Itemized deductions - F1, J1, H1B and TN visa taxes
Itemized deductions - F1, J1, H1B and TN visa taxes
These are short descriptions of a variety of tax deductions that are often left OFF your tax return. These descriptions are NOT comprehensive, and you should do further research (or ask for a more detailed explanation on the forum) to determine if you qualify.
- Non-Cash Contributions (Itemized Deduction). Money is often tight, and while we all try to give as much as possible, sometimes we cannot give as much as we want. However, we have all given old clothes and furniture (maybe even a car) to the Salvation Army and Goodwill. Now you want to deduct those donations, which you can do if you itemize your deductions on Schedule A.
First, be aware that if you get audited, you must prove that you gave the clothes and furniture by showing a receipt. If you do not have a receipt, it is likely that the donation deduction will be disallowed. So if you are planning to give away clothes, furniture and the like, make the effort to get the receipt.
Now, how much to claim? You cannot claim the price you paid for the clothes and furniture. The IRS expects you to deduct the fair market value (FMV) of the clothes. You can determine FMV with a trip to your local thrift store. What they charge is what you can claim for the clothes.
Finally, do not be greedy!! Goodwill, Salvation Army and other charities give out dated blank receipts to allow YOU to fill in the amount given and the FMV of what was given. You may be tempted to exaggerate what you gave. If you go too far and try to say $500 of used clothes and furniture is worth $5,000, the IRS can verify the donation with a simple phone call to the charity, which maintains a detailed log of what was given on which date and by whom. Claiming a bedroom set and four large bags of clothes is worth $5,000 is a good way to get the donation deduction disallowed in total plus get hit a large fraud penalty (up to 100% of the tax due).
If you decide to donate a used vehicle (car or truck), you must have extensive paperwork to document your donation. This has been an area of significant fraud in the past ten years, so new rules require the charity to notify you for what the amount they sold the vehicle. That is the amount you can claim on your tax return. However, generally speaking, if you claim $500 or less as the deduction for a used vehicle, it is unlikely that the IRS will challenge that amount, since $500 is normally the lowest amount with which you can buy any type of car or truck.
Finally, if you have already donated to the Salvation Army or Goodwill and neglected to get a receipt, you can go ahead and claim the deduction if it is not too large relative to your income. The IRS normally will not question a $500 non-cash contribution if your income is around $40,000. If your donation is $2,000 for a $40,000 income, then you better have the receipt, as it is much more likely the IRS will question such a donation.
- Health Insurance Premiums (Itemized Deduction). Due to a deduction floor that is equal to 7.5% of your Adjusted Gross Income, most people cannot deduct the medical costs as an itemized deduction on Schedule A. That means that if you make $50,000, the first $3,750 of your medical costs are NOT deductible. Even if you add in what you pay from your paycheck for your medical coverage, you probably will not exceed that 7.5% floor.
However, if you had to pay out-of-pocket a rather large medical expense that was NOT covered by your insurance, then you want to add your medical insurance premiums to the deduction calculations, because it is likely you have exceeded your 7.5% floor.
Further, if you are self-employed or work as a contractor (getting paid on a Form 1099-MISC), then you can document your medical insurance premiums on Schedule C and deduct them as an adjustment to income rather than as an itemized deduction. In that case, the 7.5% floor does NOT apply.
- Educator Expenses (Adjustment to Income). A significant number of H-1B visa holders work in the education system. If you are one of them, you may be eligible to deduct $250 of your expenses associated with that work. You must a teacher, instructor, counselor, principal or aide who has worked at least 900 hours in a school that has grade levels ranging from kindergarten through 12th grade. Eligible expenses are most any item that is used in the classroom to aid in teaching or presenting education material. While a $250 deduction is not much, it is better than nothing and it is easily claimed if you work in a K – 12 school.
- Student Higher Education Expenses (Credit/Adjustment to Income/Itemized Deduction). Most everyone knows about the Hope and Lifetime Learning Education Credits or tuition deductions. However, a fair number of people do not realize that they can also claim a deduction for education costs that are related to their employment, IN ADDITION to the educating credits. There are a number of requirements that must be met for the education to be considered work-related, but most people normally attend school to enhance their work skills, so these requirements are usually met quite easily.
Example: In 2005, an H-1B visa holder named Patra works as a software engineer in New York City, earning $75,000 per year. Patra also attends graduate school at New York University, studying advanced software engineering concepts. While she is on a partial scholarship, she still pays $15,000 in tuition. Her employer reimburses only $5,000 of the cost, and she deducts $4,000 as an adjustment to income. That leaves $6,000 that she can claim as a deduction under work-related education. She can claim this deduction by completing Form 2106 and claiming the deduction under the Miscellaneous Deduction section of Schedule A. There is a 2% AGI floor that she must meet, which means the first $1,500 is NOT deductible. Since it is an itemized deduction, the $4,500 remaining deduction would not exceed Patra’s $5,000 standard deduction. However, since she works and lives in New York City, she also pays about $5,000 in state and city income tax, which, when combined with the $4,500 education deduction, is almost DOUBLE her standard deduction.
Please note that you MUST factor in all reimbursements, grants and scholarships when you claim these deductions. For this reason, it is probably best to use a tax professional to prepare the returns. Still, this work-related deductions can save you thousands in taxes if you qualify.
- Student Loan Interest (Adjustment to Income). Very few people can attend undergraduate or graduate school and pay for it out of savings. A few fortunate people get scholarships. Most everyone else borrow the money and, once they are done with school, have to pay the money back with interest. For the last several years, that student loan interest has been deductible as an adjustment to income IF you did not make too much money. For 2005, the cut-off for claiming this deduction was $65,000 if you were single and $130,000 if you were married and filed jointly. The AGI requirement is historically the biggest obstacle, since salaries in high cost-of-living areas for most professionals can start in the low six figure range, thus precluding you being able to claim this deduction. Further, even if you do not make $100,000 a year, your spouse may, and you CANNOT claim this credit by filing separate tax returns.
Still, many people starting out CAN claim this deduction, provided they meet the criteria for being an eligible student and provided that the interest is from a qualified student loan. These conditions are normally easily met, but you should research it (either by going to Internal Revenue Service or posting a question on the forum) before you attempt to claim this deduction.
Retirement Savings Contribution Credit. This credit was designed to encourage those of modest means to begin to save towards their retirement by contributing to a retirement plan at work or to a Roth or traditional Individual Retirement Account (IRA). It is NOT for everyone, but rather those whose income does not exceed the following limits:
Single filers: $25,000. Married filing jointly: $50,000. Head of Household: $37,500.
Further, you CANNOT qualify for this plan if you are under 16 years of age OR if you are a student. The credit is not much (it tops out at $1,000 for a married couple filing jointly, and it is dependent on how much you save), but it is better than nothing, and it does serve as an incentive to start saving for retirement, something most everyone should do as soon as they leave college.
- Points (Itemized Deduction). The term points refers to the pre-paid interest on home mortgages, whether it is a first or second mortgage. Points are documented on the HUD Form 1 closing statement that you receive when you close on the loan. Listed on the second page, they are clearly marked as discount points. However, the loan origination fee (normally one percent of the loan) is also considered a point.
Points can be claimed as a deduction in total in the year the loan is originated if you are purchasing a home with the loan. IF you are refinancing, or you are originating a second mortgage, then you must amortize (stretch out) the deduction over the life of the loan. Such amortization reduces the value of the deduction. However, if you refinance again, either later in the year or in a successive year, you can then claim the part of the points (the unamortized portion) have not yet been claimed in the tax year you did the second refinance.
The points, be they marked as discount points or as the loan origination fee, are normally documented on the Form 1098 that you will receive from the bank or mortgage company in late January. If you bought a house, look for this important deduction on the Form 1098. If you refinanced, you need to dig out your closing paperwork to claim the points from the previous loan.
Capital Losses (Direct Offset). When you buy or sell capital assets, you want to show a profit. Unfortunately, that is not always possible. However, you DO get a tax benefit if you sell a capital asset (be it stocks, bonds, mutual funds, a business property, whatever) for a loss.
Capital gains and losses are normally reported on Schedule D when you file your tax return. Such gains and losses are separated into short-term (for assets owned for a year or less) and long-term (for assets owned for more than a year). Short-terms losses will first offset short-term gains, and long-term losses will first offset long-term gains. After this initial set of offsets, ANY loss remaining will offset ANY gain remaining.
With all the offsetting completed, you now show a capital loss. Up to $3,000 of that loss can be used to offset ANY other source of income, be it wages, dividends, interest, rental income, etc. If your capital loss exceeds $3,000, the remaining loss carries forward to future years to be used against future capital gains or, in $3,000 yearly increments, to be used against other income. This will continue until you use up the accumulated loss, or until the taxpayer who incurred the loss dies.
- Moving Expenses (Adjustment to Income). This used to be an exceptionally large deduction because virtually any expense associated with a move in excess of 50 miles was deductible. However, it was an itemized deduction, so a fair number of people could not claim their moving expenses because the expenses did not exceed their standard deduction.
Congress addressed that inequity in the 1990s by changing the law, making moving expenses (reported on Form 3903) an adjustment to income. That means anyone can claim moving expenses now IF they meet the time and distance tests (discussed below). However, as a tradeoff, the number and type of deductions associated with the move were dramatically cut back. Only the costs directly associated with moving your personal effects can be deducted. This means the cost of moving your household goods, the travel costs (a mileage rate for all your cars plus the mover’s costs plus the lodging costs) during the actual move and the storage costs for your household goods are deductible, and that’s it! The costs of meals during the move are not deductible, nor are the costs of sell your old house and buying your new house. Further, any costs of trips made prior to the move to look for an apartment or house are also not deductible. So while the current moving expense deduction can be claimed virtually anyone who moves from one city to another (in most cases), the deduction is not nearly as lucrative as it once was.
The Time Test states that, as an employee, you “work full time in the general area of your new workplace for at least 39 weeks during the 12 months right after your move.” Self-employed people must work at least 39 weeks during the 12 months right after your move AND a total of at least 78 weeks during the 24 months right after your move. There are exceptions to the Time Test, but they are too involved to discuss here. If you have questions, please post them on the forum.
The Distance Test is generally thought to be 50 miles. However, this test does not refer to the distance you move, but the difference between the driving distance from your old home and your new workplace and the driving distance your old home and your old workplace. Example: Let’s say you work in downtown Dallas and live in an eastern suburb of Dallas. Your daily commute is 15 miles. You take a new job in Fort Worth, which is about 35 miles from your old job location. Not wanting to commute 100 miles round-trip each day, you decide to move to a suburb west of Fort Worth. Your move from the eastern suburbs of Dalas to the western suburb of Fort Worth is about 80 miles, so you think the move qualifies for the Moving Expense deduction. That’s not the case. As noted above, the difference between the driving distance from your old home and your new workplace (50 miles) and the driving distance your old home and your old workplace (15 miles) is only 35 miles. Even though your move covered 80 miles, the difference, being only 35 miles, means that you cannot claim any moving expenses associated with your job change.
- Sales Tax Deduction (Itemized Deduction). A recent change to the Internal Revenue Code allows you to deduct the sales taxes you pay on your purchases throughout the year, IF these sales taxes exceed what you had withheld for state and local income taxes. In high tax states like California, New York, New Jersey and Massachusetts, this deduction means nothing, because the withheld taxes will well exceed any possible taxes paid. If, however, you live in a state with a relatively low income tax, it is possible that your sales tax deduction will be greater than the state income tax withheld. This is especially true if you have bought a big ticket item, like a car or a boat.
Of course, if you live in a state that has no income tax (like Texas, Florida, Washington, New Hampshire), then the sale tax deduction will be a big deduction for you. The computations are relatively simple, and in addition to the deduction that comes from those computations, you can write any big-ticket item you bought in 2006.