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Bait-and-switch maneuvers on tax breaks
Are you a tax-breaks bait-and-switch victim?
In the never-ending quest to lower IRS bills, taxpayers grab for every tax deduction, tax credit and tax-saving move they hear or read about. That’s generally a good idea.
Sometimes, though, great-sounding tax breaks aren’t always as advertised.
Sure, on first glance, they seem like the perfect way to reduce your taxes. But when you get the full story, they do you little or no tax-saving good at all.
The problem isn’t the typical income limits or filing-status restrictions that apply to many tax breaks. It’s the pesky full details of the tax laws that aren’t always spelled out upfront.
So keep looking for ways to save on taxes, but don’t get your hopes up unnecessarily about these six popular tax breaks that aren’t exactly what they seem.
Job-search expenses are tax-deductible
Hunting for a new job can be a maddening and costly endeavor. But at least you can deduct your job-search expenses.
True. But only partially true.
First, you must be looking for a job in the same field. You can’t use the tax code to subsidize a career change. And first-time job seekers can’t claim their job-search expenses.
Then, you must itemize. Most people don’t. If all your itemized expenses don’t add up to more than the standard deduction amount you can claim, then there’s no reason to itemize, and you can’t claim your job-search expenses.
Even if you do itemize, you must claim your job-search costs as a miscellaneous expense on Schedule A. And before you can subtract these costs, they must come to more than 2 percent of your adjusted gross income, or AGI.
A filer with an AGI of $30,000 must have more than $600 in miscellaneous expenses. Note the “more than” requirement. Total miscellaneous expenses of $605 mean just a $5 deduction in this category.
Charitable donations are tax-deductible
Giving to a good cause feels great. So does getting to deduct your donation.
Not every charitable gift, however, is tax-deductible.
If you claim the standard deduction, you can’t take tax advantage of charitable gifts. Donations are deductible only if you itemize.
Contributions, be they cash or property, also must go to groups in good standing with the IRS. If they aren’t, you can’t claim your charitable donations.
And gifts to many legitimate good causes aren’t deductible because of the way the collection is structured. For example, the money you dropped in a jar at the local diner to help a family wiped out by a fire is not tax-deductible. Neither are the expenses you picked up for your child who does missionary work. Regardless of the worthy intentions, the IRS considers these gifts to individuals, not to a registered charity.
And all those raffle tickets you bought to support your child’s school programs can’t be claimed as charitable donations either.
So keep giving as much as you want to all the good causes you support. Just know that you might not be able to deduct all your gifts.
Medical expenses are tax-deductible
Even with health insurance, many people find they personally pay a lot for medical treatments. Thank goodness those out-of-pocket medical costs are tax-deductible.
Yes, they are, to a point.
To claim medical expenses, you must itemize instead of taking the standard deduction amount.
And you can’t claim every penny you spend on medical treatments.
Medical expenses can be deducted only if they are greater than 10 percent of your adjusted gross income, or AGI. This increase from 7.5 percent of AGI took effect in 2013 as part of the Affordable Care Act, or Obamacare. (An exception: Taxpayers who are 65 or older can still use the previous 7.5 percent threshold through the 2016 tax year.) A taxpayer with a $40,000 AGI will need more than $4,000 in medical bills, meaning that total medical costs of $4,100 only will produce a $100 itemized medical deduction.
The good news here is your medical deductions are not limited to insurance copays and prescription costs. There are many medical costs that can be counted, so if you’re close to your itemized medical threshold, check out all the possibilities that could help you claim this deduction.
A flexible spending account cuts taxes
A medical flexible spending account, or FSA, is a welcome workplace benefit for many. You make contributions to the account before taxes are calculated, and then you use that tax-free money to pay for uncovered medical expenses.
But an FSA is not for everyone.
It can reduce the amount of taxes taken from your paycheck, but for some workers, those tax savings are negligible.
FSA contributions are limited to $2,500, with annual inflation increases, again due to Affordable Care Act changes in 2013.
FSA reimbursement rules also have been tightened. You now need a doctor’s prescription to use FSA funds for over-the-counter medications.
And if you don’t plan your FSA contributions and spending carefully, you could lose all or some of your money. Some companies do allow FSA participants to roll up to $500 of their unused account money into the next benefits year. Others offer workers a grace period, up until March 15, to use FSA money. But without these options, which are voluntary on a company-by-company basis, you’ll lose any money left in your account.
So evaluate your financial and medical needs before you sign up for an FSA. It might not be as tax-beneficial for you as you thought.
Meals, entertainment are tax-deductible
As a businessperson, cultivating good relationships with clients is critical. Thank goodness you can deduct all those business meals and entertainment costs.
Not so fast, Mr. or Ms. Entrepreneur. This seemingly helpful tax break is full of requirements.
The major tax-deduction hurdle is that you and your business client can’t just enjoy your dinner or lunch or the big game. You and your guest must talk business. You don’t have to necessarily ruin the event; the work-related discussion can be before or after you eat or the kickoff. But it has to be directly related to the running of your trade or business.
Also, don’t go overboard. If you take your business client to that posh new eatery, the IRS could deem the expense lavish and disallow at least part of the expense.
But the biggest tax-break switch here is that even when you do follow the IRS meals and entertainment rules, you can only write off half of these costs. That’s right. Only 50 percent of these business expenses are deductible.
Gambling losses are tax-deductible
Enjoy your Las Vegas vacation, and don’t worry about taxes due on your winnings. After all, you can deduct your bad bets.
It is true that Uncle Sam helps you limit any tax bill on gambling payouts by allowing you to offset your winnings with your gambling losses. As with many other tax breaks, however, it’s not quite that simple.
You report gambling winnings as “other income” on line 21 of Form 1040, but you must itemize to deduct losing bets. If you have few other expenses to claim on Schedule A, it probably won’t be worth sacrificing your standard deduction amount just to limit or erase your taxable winnings. Do the math to make sure.
The good news with gambling losses, however, is that they have their own special line (number 28) on Schedule A, “Other miscellaneous deductions,” and are not subject to the general 2 percent of adjusted gross income limit.
But don’t go crazy in Sin City or other gambling locales thinking Uncle Sam will underwrite your bad betting luck. You cannot deduct more than you won. And excess gambling losses cannot be carried forward to future tax years.