Although the tax code permits a wide range of deductions for taxpayers in various situations, thousands of filers routinely claim deductions for various types of expenses that are in fact non-deductible. Here is a list of some of the more common non-deductible expenses that show up on tax returns each year.
- Spousal and Child Support
Many taxpayers try to deduct these two forms of familial support on their returns. However, alimony is the only type of income paid by one ex-spouse to another that can be deducted. (Find out how to deal with the tax issues that arise for divorced parents with dependent children in Taxing Times For Divorced Parents.)
- Unreimbursed Work Expenses
Although self-employed taxpayers can deduct every dollar of work-related expenses, W-2 employees can only deduct unreimbursed expenses in excess of 2% of their adjusted gross incomes - and only those who are able to itemize their deductions.
- Above-the-Line Deduction for Roth IRA Contributions
Unlike traditional IRA contributions, there is no deduction for Roth IRA contributions because the income distributed from them is tax-free, whereas traditional IRA and retirement plan distributions are taxable as ordinary income.
- 529 Plan Contributions
Taxpayers who contribute money to the 529 plan sponsored by their own state can often take a deduction for their contributions up to a certain limit on their state returns. However, there is no federal deduction available for this.
- Political Contributions
Cash or property donations to any qualified 501(c)(3) organization are deductible, but political parties do not fall into this category. Unfortunately, but that $100 you sent in to get the candidate of your choice elected doesn't go anywhere on the 1040.
- Homeowners' Insurance
The only time that this can be deducted is for those who either use part of their home for business or for those who own rental properties. Homeowners outside these categories cannot deduct their homeowners' or rental insurance under any circumstances. (Learn how fixing a few pipes can be more profitable tax-wise than adding a new roof in Tax Deductions For Rental Property Owners.)
- Life Insurance Premiums
Except for coverage available inside Section 125 Cafeteria Plans and a small amount that can be purchased inside a qualified plan, life insurance premiums are non-deductible for individuals. Group life insurance premiums can be deducted by employers within certain limits.
- Dependents Whom You Cannot Claim
Many separated and divorced couples race to claim some or all of their dependents each year whether they can or not. The IRS has a fairly clear, albeit complex set of rules that determine who gets to claim which kids. In some cases, one parent will get to claim the dependency exemption, while the other is eligible for the Child Tax Credit or Dependent Care Credit. However, both parents often try to claim the same dependent in the same year, thus causing the return of the one who files second to be rejected. Those in this category who are legitimately entitled to claim a dependent or dependents must take up their case with the IRS and furnish proof, such as a divorce decree, that establishes their eligibility.
- Substantial Contributions of Tangible Property to Charities
Although the entire amount of any property that is donated to charity can be deducted eventually, the dollar limits for this type of contribution are lower than for cash. Cash contributions of up to 50% of adjusted gross income (AGI) are deductible, but property donations have a limit of 20% or 30% of AGI. Make sure that your property does not exceed these income limits in the year that you give it to your charity. (Being generous has never been more (financially) rewarding! Check out Give To Charity; Slash Your Tax Payment.)
- Passive Losses
Tax losses that are generated from certain types of investments or activities, such as partnerships, can only be written off against passive income, which is defined as income for which the recipient had no material role in generating. Passive losses cannot be deducted against active income, such as earnings or investment income.
- Capital Losses
Although capital losses can be used to offset any amount of capital gains, they can only be deducted against $3,000 of other income each year. If you flushed your $50,000 nest egg down the toilet last year in the stock market and had no gains to declare it against, then you will only be able to deduct $3,000 of that loss as a long or short-term loss each year. If you try to write the entire balance off at once, the IRS will gently inform you that you will have to prorate the loss for the next 17 years. Unless, of course, you reap a large gain in the future, in which case you can write off as much of the remaining loss as there is against whatever amount of gain you have earned.
The Bottom Line
This is only a list of the more common deductions that taxpayers frequently attempt to claim. If you are unsure whether a specific expense that you incurred during the year is deductible, visit the IRS website at http://www.irs.gov/ or consult your tax advisor. (The receipts you cram into your wallet could be replaced with cash come tax season. Find out how in 10 Most Overlooked Tax Deductions.)