Archive for the ‘unreimbursed employee business expenses’ Tag
Back to Basics Part V – Schedule A Wrap-Up
Filed under: Back to Basics | Tags: 2%, amortizable bond premiums, business miles, casualty and theft, casualty loss, education expenses, employment agreement, Federal estate tax, gambling losses, home office, income in respect of decedent, investment expenses, IRA fee, itemized deductions, job search expenses, legal expenses, meals and entertainment, miscellaneous itemized deductions, not subject to two percent, other miscellaneous deductions, phase-out, Ponzi schemes, reimbursement plan, Schedule A, tax preparation fees, theft loss, two percent limit, union dues, unrecovered investments in annuities, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
December 12, 2014
In this issue, we are finishing our discussion on Schedule A – Itemized Deductions. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.
The fifth section of Schedule A is for personal casualty and theft losses. This is designed to help people with major losses. The deduction on schedule A is calculated by taking the amount of the loss, subtracting $100, then subtracting 10 percent of your adjusted gross income. Any amount left over will be an itemized deduction (if any). There are several ways to calculate the amount of the loss but it is generally limited to the lesser of your adjusted cost basis or the decrease in the fair market value. Sometimes appraisals are necessary to establish the decrease, but in all cases, the amount of any insurance proceeds received would reduce the loss. Another salient point is that the loss generally has to be sudden, unexpected, and permanent in nature; it is not the result of degrading over time. For instance, a car accident or theft would qualify; termite damage would not qualify. Losing something does not qualify either. Business casualty losses are not reported on Schedule A.
The next section deals with miscellaneous itemized deductions subject to two percent. This means you take all the deductions in this section, subtract two percent of your adjusted gross income, and the left over amount is your itemized deduction for this section (if any). Some of the deductions here include unreimbursed employee business expenses, union dues, investment expenses, income tax consultations and preparation, legal expenses related to your job or to the extent they deal with tax issues or the protection of future taxable income, job search or education expenses (if they relate to your current field), etc.
Unreimbursed employee business expenses are those which are ordinary and necessary and the employer expects the employee to pay for the expenses. If the employer has a reimbursement plan, but the employee simply fails to request reimbursement, the expense will not qualify. It is best if the employer has a written policy, or as part of the employment agreement, spells out what things the employee is expected to cover. Sales people can often have high deductions in this area through business miles on their vehicles and meals and entertainment for clients. If a company provides no office space for an employee and the person has an office in his or her home, deductions can be taken for that as well.
Investment expenses paid to financial advisors or even IRA fees can be deductible. Financial advisor fees must be prorated if you have taxable investment income and tax free investment income such as municipal bond interest. Only the portion allocated to taxable income is deductible. For IRA fees to be deductible, they must be paid with funds outside the retirement plan. This is preferred anyway so as not to deplete your retirement account by using IRA funds to pay the fees.
The last section of deductions on Schedule A is called “Other Miscellaneous Deductions.” These are NOT subject to the two percent of adjusted gross income floor, and the full amount become itemized deductions. These are less frequently encountered and include things like Federal estate tax on income in respect of decedent, gambling losses up to the amount of winnings, losses from Ponzi schemes, casualty and theft losses on income-producing assets, amortizable bond premiums, unrecovered investments in annuities and other items.
The final part of Schedule A is one more “gotcha.” If your income is over $305,050 for Married Filing Joint or $254,200 Single, part of your deductions begin to phase out. Medical expenses, investment interest, casualty, theft, and gambling losses are not subject to the phase out. The rest of the deductions can be reduced by as much as 80 percent! The amount is determined by taking your adjusted gross income, subtracting the above figure based on your filing status, and multiplying the result by three percent. That is your adjustment capped at the 80 percent maximum.
In two weeks we will continue our Back to Basics series with Schedule B – Interest and Ordinary Dividends.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part II – Schedule A
Filed under: Back to Basics | Tags: 1040, 2014, charitable deductions, Forms, medical expenses, miscellaneous itemized deductions, mortgage interest, real estate taxes, Schedule A, Schedules, standard deduction, state taxes, unreimbursed employee business expenses
Leave a comment Originally published in the Cedar Street Times
October 31, 2014
Two weeks ago we discussed a general overview of the Form 1040 – a personal income tax return. The 1040 can be thought of as a two-page summary of your taxes in a nutshell. (I should mention also there are two other shorter forms that could be filed instead: a 1040A and a 1040EZ. These are for simpler returns and have income limits and other restrictions. In practice, however, anyone using tax software does not really have to decide which form to use and the software will generally optimize as appropriate. For our discussion we will focus on the 1040.)
The details for many of the items on the Form 1040 are actually determined on subsequent Schedules and Forms. Schedules are labeled with letters of the alphabet and additional forms are generally four digit numbers. Schedules are generally more major topical areas. For instance, Schedule C – Profit or Loss from Business, which is a summary of all the activity of a sole proprietorship. It may in turn have subsequent forms that support it. Forms are often more narrowly focused and would generally support other schedules or forms. For instance Form 4572 Depreciation, could support the calculation of depreciation expense for a business on Schedule C, a rental property on Schedule E, a farm on Schedule F, etc. I have not counted them all, but I have read the IRS has over 800 forms and schedules. The reality is that most people are covered by 30 or 40 of those 800!
Let’s start at the beginning of the alphabet – Schedule A. (I am sure this saddens you, but we will not be going through all 800 in this series of articles, but we will hit on a number of the most common ones!) Schedule A is for itemized deductions. You probably hear lots of people justify expenses by tossing around the phrase, “it’s deductible.” However, just because something may be deductible, does not mean it will benefit you. This is easily seen with Schedule A. Schedule A covers a host of “expenses” that most people have that our tax code has graced as good behavior and therefore allows a deduction for it. Medical expenses, state and local taxes, real estate taxes, mortgage interest, charitable deductions, unreimbursed employee business expenses, my favorite – tax preparation fees, investment expenses, etc.
Since Congress realized that everyone had some of this, and it would be a pain for people to track it, they decided to allow as an option a “standard deduction” for everyone in lieu of tracking and itemizing all those deductions. The standard deduction was created to generally cover what many people would have on the average anyway. For 2014 this standard deduction is $6,200 if you file as Single or Married Filing Separate, $12,400 if you file Married Filing Jointly or Qualifying Widow(er), and $9,100 if you are filing Head of Household status. If you believe you would have more than this, then you would itemize the deductions using Schedule A.
Mortgage interest and real estate taxes are the two areas that push most Californians into the itemizing zone. In other words, if you do not own a home, there is a good chance you won’t be itemizing. This is not always true: sometimes people don’t own a home, but make a lot of money and pay a lot of deductible state income taxes which would push them over the standard deduction, or maybe they work in sales jobs where they have lots of unreimbursed employee business expenses, or have major unreimbursed medical expenditures, or are perhaps like you dear reader, and have a heart of gold giving away buckets of money to charitable organizations each year! Or it could be a combination of things – paid some income taxes, have a stingy boss that won’t reimburse, and maybe you have a heart of bronze.
Next week we will discuss more specifically the deductions on Schedule A and how they can come out looking a little thin after running the Schedule A gauntlet.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 