5 MOST ITEMIZED DEDUCTIONS YOU NEED TO TAKE THIS TAX SEASON - SAVE YOU MONEY!

Today let’s talk about 5 itemized tax deductions that can you big money this tax season. But before we get into that we can quickly go over the difference between itemized versus standard deductions.

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Schedule A is the way you itemize your deductions. It’s basically a list of all your itemized deductions for the year. But you only use this form if you are itemizing. You can either itemize or take the standard deduction. The standard deduction is really just that, the standard deduction that the IRS allows you to take each year. The amount depends on your tax status (Single, Married Filing Jointly, Head of Household, etc.) and whether or not you are claimed as a dependent by someone else. You can also get an additional standard deduction if you are blind and/or over the age of 65. You don’t have to track or prove anything. You can take this deduction every year no matter what. Itemized deductions are things like medical costs, long-term care, property taxes, mortgage interest, personal property tax and many others. If you’ve tracked this information throughout the year you can choose whether or not you want to take the standard deduction or the itemized. Basically choose the larger amount as it will give you the biggest tax benefit. You can work it out both ways to see which is best for you. (We do this for you if PJF is preparing your taxes.)

One thing to keep in mind is if you itemize, the alternative minimum tax could kick in if your income is too high. What that means is your deductions are added back to an alternative tax calculation to determine if you need to pay a minimum amount of tax. Basically, you calculate tax two different ways. It’s the IRS’ way of making you pay a minimum amount of tax even if you have a lot of itemized deductions.

So if you are itemizing this year here are the 5 itemized tax deductions to look for to help lower your taxable income.

  1. Sales Tax or Income Tax – If you live in a state like Minnesota with income tax you can deduct all of the income that you pay over the year. If you are using a tax software it will usually take this deduction for you. The thing to look for is if your income is low this year (or there is no state sales income tax) you should deduct your sales tax instead. For example, if you purchased a car you might have paid a large chunk of sales tax on that purchase. As long as you have documentation to prove it you can deduct this along with all of the other sales taxes you’ve paid over the year. Consider calculating both income and sales tax to make sure you are taking the largest deduction possible.
  2. Property Taxes – This is all of the taxes that you pay related to your personal or real property. The biggest one could be your primary residence but could also include your vacation property (assuming you don’t rent it out – if you do then the taxes would go on schedule E). This deduction also includes auto and boat registration taxes. Basically any state or local taxes that you paid throughout the year charged on personal property, based on the value of the property and charged on an annual basis
  3. Mortgage Interest Deduction – This is the mortgage interest paid on your primary interest and vacation/second home. However, you only get to deduct the interest on up to $1,000,000 of mortgage debt. I know this seems like but I’ve seen cases where a primary residence and cabin debt get over the $1,000,000 mark pretty quickly. We love our cabins in Minnesota!
  4. Charitable Contributions – This is any donation to non-profits like cash or non-cash items like clothing and household goods. Keep in mind if the value is over $500 you have fill out the additional 283 Form. And if the value is over $5,000 you have to get the item appraised. Do not appraise it yourself the IRS won’t count this.
  5. Miscellaneous Deductions – Some examples of these things could be safe deposit boxes, estate planning fees,  tax preparation fees, unreimbursed employee expenses, investment management fees, casualty losses, and gambling losses (only to the extent you have gambling gains.  Keep in mind most of these deductions are subject to 2% of you AGI meaning the combined amount of these expenses have to be over 2% of your adjusted gross income in order to be deductible at all.

There you go, the five deductions you need to take this year if you’re itemizing. The 6th item that I left off the list is Medical deductions. I left if off because it is harder to meet the threshold. If you are older than age 65 it is subject to 7.5% of your AGI and for everyone else is 10% of your AGI. If you’ve itemized in previous years you should consider taking a look to make sure you took every deduction on this list. If not you can amend a tax return within three years of the date you filed or within two years form the date you paid the tax, whichever is later.

How Do I Avoid Paying Tax On My Vacation Rental?

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Vacation/Second Home Rental: How do I report it and how do I avoid paying tax?

So you’ve got this great idea of having someone else pay for your vacation/second home by renting it out. Well, it’s not a bad idea but make sure you understand the tax consequences and use this tip on how to avoid paying some of the tax generated from receiving income on your property.

In general if are receiving income from renting out a “dwelling unit” like a house or apartment you can deduct certain expenses? Some common expenses include:

  •          Mortgage interest,
  •          Real estate taxes,
  •          Utilities
  •          Casualty losses
  •          Maintenance
  •          Insurance, and
  •          Depreciation

All of these things reduce the amount of rental income that is subject to tax. Just like a profit and loss for any business your revenue less expenses equals your net income. You are essentially running a mini small business. You generally report the income and expenses on your form 1040 using Schedule E (Supplemental Income and Loss). If you are only trying to rent for a profit and do not use it as a personal residence at any point during the year and your rental expenses are more than your rental income you will show a loss on your tax return. This loss might be limited by what the IRS call’s “At-Rick” or “Passive Activity Loss Rules.” For more info on limits of your losses check here Publication 925, Passive Activities and At-Risk Rules.

If you use your rental property as a personal residence at some point during the year other limitations will apply to the amount of expenses that you can deduct. You are considered to use a property as a personal residence if during any tax year you use it for the greater of 14 days or 10% of the total days you rent it to others (at a fair rental price – discounted rents for friends and family don’t count.).

You might have two personal residences during any given tax year. For example if you live in your primary residence 8 months, this residence is considered a personal residence. Then if you live in a condo down south for the other 3 months of the year, your condo is also considered a personal residence. For tax purposes a day of personal use at any property is defined as any day that it is used by:

  •    You or any other person who has an ownership interest in it
  •    A member of your family or family of any other person with an ownership interest in    it, unless the family member uses it as his or her main home and pays a fair rental        price
  •    Anyone under an agreement that lets you use some other dwelling unit
  •    Anyone at less than fair rental price

If this is the case (used for both rental and personal purposes) you need to divide your total expense between the rental use and the personal use based on the number of days for each purpose. For example if you have $10,000 of expenses and you rent it out for half of the year you only get to deduct $5,000. You will not be able to deduct your rental expenses in excess of the gross rental income limitation which is your gross rental income less the rental portion of mortgage interest, real estate taxes, casualty losses, and rental expenses like realtor’s fees and advertising costs. However, you may be able to carry forward some of these rental expenses to the next year. (Subject to gross income limitation for that year). If you itemize your deductions on From 1040 Schedule A you might still be able to deduct your personal portion of your mortgage interest, real estate taxes, and casualty losses. However you cannot choose to add more to your schedule A then the percentage personal use would allow.

There is a special rule where you can avoid paying tax on your rental income if you rent it for fewer than 15 days. If this is the case you do not have to report any of the rental income on your tax return (but you also can’t deduct any expenses). Therefore, if you can find a short-term rental income you can effectively receive the rent tax free. That’s about as good as it gets when the IRS is involved.

How to get Tax Help in Minnesota - Who to call

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Taxpayer Help in Minnesota

We know how frustrating taxes can be. That’s why we are here to help. But if you want to take your issue right to the IRS, how do you go about doing that? Well, did you know the IRS actually offers face-to-face tax help right here in the great state of Minnesota? They actually have offices all over the country but we live in Minnesota so today we are helping out of fellow resident. Make sure you check the Services Provided to make sure they can do what you are looking

Bloomington

1550 American Blvd. East
Suite 700
Bloomington, MN 55425
Monday -Friday - 8:30 a.m.- 4:30 p.m.
(651) 312-8082 

Services Provided

Duluth

515 W. First St.
Duluth, MN 55802 
Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)
(218) 626-1624 

By Appointment

Services Provided

Mankato

1921 Excel Dr.
Mankato, MN 56001
Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)
(507) 625-4977

Services Provided

Minneapolis

250 Marquette Ave.
Minneapolis, MN 55401 
Monday-Friday - 8:30 a.m.- 4:30 p.m.
(651) 312-8082

Services Provided

Rochester

310 South Broadway
Rochester, MN 55904
Monday-Friday - 9:00 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)
(507) 281-3044 

Services Provided

St. Cloud 

1010 W. Saint Germain St.
St. Cloud, MN 56301
Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m.-12:30 p.m.)
(320) 251-9261

St. Paul 

430 North Wabasha St.
St. Paul, MN 55101
Monday-Friday - 8:30 a.m.- 4:30 p.m.
(651) 312-8082 

Services Provided

Before dropping in to chat with the IRS you might want to see if you can solve your problem online. Through the IRS website (IRS.gov) you can do the following:

• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.

We have dealt with the IRS many times so if you are feeling frustrated after talking with an IRS agent (trust me, it can be a frustrating process) the let us know. We might be able to solve your problem quicker and easier.

Schedule an Appointment to talk with us today.