Understanding Tax Deductions – Tax Services Traverse City

Do you understand what basic tax deductions you are allowed?

Here are a few commonly misunderstood tax write offs. Test your knowledge.

True or False?

1. Funds paid as child and spousal support can be deducted.

2. Funds paid towards alimony can be deducted.

3. You can write off contributions made towards your Roth IRA for retirement.

4. If you loose your shirt in Vegas, don’t worry you can always write it off later.

5. You can claim a deduction for donations you have made to political candidates throughout the year.

6. Funeral expenses can be included under the estate tax deduction.

7. I have a computer and a desk at home so I can take a home office deduction.

8. Distributions paid from a 529 prepaid college plan are typically not considered taxable income.

Answers:

1. The statement above is false, funds paid as child and spousal support cannot be deducted.

2. It’s true funds paid towards alimony can be deducted.

3. False, you cannot write off contributions made towards your Roth IRA for retirement, the contributions are already tax-free.

4. False, if you loose your shirt in Vegas, you cannot always write it off later.

Maybe, the reality is that the IRS has pretty strict rules regarding writing off gambling losses. Part of this includes only allowing you to write off your total losses for the year, after taking into consideration any winnings that you may have had. So if you won a $2,000 in February playing the lottery, but then lost $1700 in July at the casino, you actually have to claim a gain of $300, not a loss of $1700.

Another thing to keep in mind is, witting off your gambling losses may be a red flag for an audit. Work with your CPA to make sure that you have all of the necessary paperwork to support your deductions.

5. False, you cannot claim a deduction for donations you have made to political candidates throughout the year. You can however claim deductions made to non-profit charitable organizations.

6. True, there are limitations but generally speaking funeral expenses can be included under estate tax deductions.

7. False, you cannot take a home office deduction just because you have a computer and a desk at home that you occasionally use for work. There are precise rules as to what applies as a “home office” for tax purposes. For example the home office must be your “principal place of business” or a place where you meet patients, clients or customers. Consult with your CPA to make sure that you can legally deduct home office expenses.

8. True, distributions paid from a 529 prepaid college tuition plan for higher education expenses are typically excluded from taxable income as long as the educational institution is approved and the amount of the distribution does not exceed the educational expenses.

If you would like further clarification pertaining to one of these misconceptions, or would like to schedule an appointment just take a second to fill out the contact form below and someone from our Traverse City, Petoskey or Suttons Bay office will contact you promptly.