How do I deduct and substantiate my gambling losses?

You can deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on line 27 of Form 1040, Schedule A (PDF), Itemized Deductions. They are not subject to the 2% limit of your Adjusted Gross Income. The amount of losses you deduct cannot total more than the amount of gambling income you have reported on your return. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

The Service provides the following guidelines for proving gambling winnings and losses:

1. An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation usually is acceptable evidence for substantiation of wagering winnings, and losses. In general, the diary should contain at least the following information:

a) date and type of specific wager or wagering activity;

b) name of gambling establishment;

c) address or location of gambling establishment;

d) name(s) of other person(s) present with you at gambling establishment; and

e) amount(s) won or lost.

2. Verifiable documentation includes, but is not limited to, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by the gambling establishment. When possible, the diary and available documentation generated with the placement and settlement of a wager should be supported by such documentation as hotel bills, airline tickets, gasoline credit cards, or affidavits or testimony from responsible gambling officials regarding the wagering activity.

For more information refer to Publication 529, Miscellaneous Deductions; and Publication 525, Taxable and Nontaxable Income.

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 529, Miscellaneous Deductions
• Form 1040, Schedule A (PDF), Itemized Deductions

I just bought a home. What can I deduct from the settlement statement?

If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.

The only settlement or closing costs you can deduct are home mortgage interest, points that represent interest and certain real estate taxes. You may, deduct them in the year you buy your home if you itemize your deductions. Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home.

You add certain other settlement or closing costs to the basis of your home. You include in your basis the settlement fees and closing costs that are for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home

There are some settlement or closing costs that you cannot deduct or add to the basis of your home. These include fees and costs that are for getting a mortgage loan. For more information refer to Publication 530, Tax Information for First Time-Homeowners, and Publication 936, Home Mortgage Interest Deduction.

References:

• Publication 530, Tax information for First-Time Homeowners
• Publication 936, Home Mortgage Interest Deduction

May I deduct my home improvements and repairs to my home?

Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Home improvements costs are not deductible. However, you add the cost of improvements to the basis of your property.

Examples of improvements include putting a recreation room in your unfinished basement, adding another bathroom, or bedroom, putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway.

For a list of some other examples of improvements, refer to Publication 523, Selling Your Home.

Repairs maintain your home in good condition. They are not currently deductible nor do they add to your home's value or prolong its life. You do not add their cost to the basis of your property.

Some examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.

Exception: The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For more information, refer to Publication 523; Selling Your Home; and Publication 551, Basis of Assets.

References:

• Publication 523, Selling Your Home
• Publication 551, Basis of Assets

Our home was seriously damaged by flooding last year. Are there special provisions for claiming a loss since our home is located in a declared disaster area?

Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in an area that is officially designated by the President of the United States as eligible for federal disaster assistance, you can choose to deduct that loss on your return for the year immediately preceding the loss year. In other words, you may treat the loss as having occurred in either the current year or the previous year, whichever provides the best tax results for you. If you have already filed your return for the preceding year the loss may be claimed by filing an amended return, Form 1040X (PDF), Amended U.S. Individual Income Tax Return. For more information on disaster area losses (including flood losses), refer to Tax Topic 515 , Disaster Area Losses (Including Flood Losses), or Publication 547, Casualties, Disasters and Thefts (Business and Non-Business). Publication 584, Casualty, and Theft Loss Workbook, can be used to help you catalog your property.

References:

• Publication 547, Casualties, Disasters and Thefts (Business and Non-Business)
• Publication 584, Casualty Disaster, and Theft Loss Workbook
• Form 1040X (PDF), Amended U.S. Individual Income Tax Return
• Tax Topic 515, Disaster Area Losses (Including Flood Losses)

Our garage caught fire this last July. Can we claim a loss on our income tax return?

If you lose property through casualty or theft, you may be entitled to a tax deduction. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual in nature. Some examples of casualties include car accidents, fires, and vandalism. If your property is covered by insurance, you cannot deduct a loss unless you file a timely insurance claim for reimbursement. To claim a casualty or theft loss, you must complete Form 4684 (PDF), Casualties and Thefts, and attach it to your return. Claim the amount from the form on line 19 of Form 1040, Schedule A (PDF), Itemized Deductions. If your loss took place in a declared disaster area, please refer to Tax Topic 515, Disaster Area Losses (Including Flood Losses). For more information, refer to Form 4684, Casualties and Thefts, or Tax Topic 507, Casualty Losses, or Publication 547, Casualties, Disasters, and Thefts (Business and Non-business). If many items are involved, also refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook.

References:

• Publication 547, Casualties, Disasters, and Thefts (Business and Non-business)
• Publication 584, Casualty, Disasters, and Theft Loss Workbook
• Form 1040, Schedule A (PDF), Itemized Deductions
• Form 4684 (PDF), Casualties and Thefts
• Tax Topic 507, Casualty Losses
• Tax Topic 515, Disaster Area Losses (Including Flood Losses)

Is personal credit card interest tax deductible?

No. Personal interest is not deductible. For more information, refer to Publication 17, Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expense.

References:

• Publication 17, Your Federal Income Tax
• Publication 529, Miscellaneous Deductions
• Tax Topic 505, Interest Expense

I refinanced my home and paid closing costs. Are the loan origination fee, appraisal fee, document prep fee, closing fee, and title insurance or any of the other expenses deductible? Are any of the fees I paid to the bank for the loan deductible?

Deductible fees are limited to home mortgage interest and certain real estate taxes. Points that represent interest on a refinancing are amortized over the life of the loan.

Fees that are not associated with the acquisition of a loan may only have effect on the basis of the home. An example would be a transfer tax that would be charged regardless of whether a loan was involved.

Fees related to the acquisition of a loan are not deductible and are not basis adjustments. A credit report fee is a good example.

For more information, refer to Publication 936, Home Mortgage Interest Deduction ; Tax Topic 504, Home Mortgage Points; and Publication 551, Basis of Assets .

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 504, Home Mortgage Points
• Publication 551, Basis of Assets

I refinanced my home mortgage and had to pay $2,000.00 worth of points to get the mortgage. Can I claim these points as a deduction on my tax return?

Points that represent interest paid for a refinanced mortgage have to be amortized over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees are not interest and cannot be deducted. It is possible to deduct a larger percentage of the points in the first year if a portion of the mortgage proceeds is used to improve the home and sufficient cash is added to the transaction to be equal to or greater than the amount of the points. Certain other restrictions apply. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 504, Home Mortgage Points

If I must deduct points over the life of my mortgage, and I have a 30 year mortgage, does this mean that I divide the points paid by 30 and enter that amount on Schedule A?

You need to divide the points by the number of payments over the term of the loan and deduct points for a year according to the number of payments made in the year. If the loan ends prematurely, due to payoff or refinance, for example, then the remaining points are deducted in that year. Points not included in Form 1098 (PDF) (usually not included on a refinance) should be entered on line 12 of Form 1040, Schedule A (PDF), Itemized Deductions. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 504, Home Mortgage Points
• Form 1040, Schedule A (PDF), Itemized Deductions

I refinanced my home once and paid $1,230 in points. On Schedule A, line 12 (points not reported on Form 1098) I have listed $41 each year. I refinanced my home again and paid off the entire previous loan. Am I entitled to include the $984 (remaining points paid off) on Schedule A this year?

If you spread your deduction of the points over the life of the mortgage, you can deduct any remaining balance of the points in the year the mortgage ends. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Under the conditions described in the question, the $984 would be deductible in the year the mortgage ended. You would report the deduction on Form 1040, Schedule A (PDF), Itemized Deductions. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 504, Home Mortgage Points
• Form 1040, Schedule A (PDF), Itemized Deductions

What is itemizing and is it beneficial to me?

Itemization is the process of listing specific deductible personal expenses you paid during the year including but not limited to medical and dental care, state and local income taxes, real estate taxes, home mortgage interest, and gifts to charity. Such a list would appear on Form 1040, Schedule A (PDF), Itemized Deductions.

When you complete your list, you total the amount spent and compare the total with your standard deduction. Generally the larger of the two deductions, standard or itemized, will be the deduction to choose, since it will lower the amount of federal income tax you will owe. For additional information, refer to Tax Topic 501, Should I Itemize?

References:

• Form 1040, Schedule A (PDF), Itemized Deductions
• Tax Topic 501, Should I Itemize?
• Publication 17, Your Federal Income Tax For Individuals

I am in a disaster area and heard the IRS could help me. What can the IRS do?

If you have been impacted by a Presidentially declared disaster, the IRS may help you by allowing additional time for filing returns and making payments, and waiving penalties, in some circumstances, if the disaster has caused you to file or pay late. The IRS may also, provide copies or transcripts of previously filed returns, free of charge. You may be eligible to file for a casualty loss deduction on the prior year's tax return, or by amended return (Form 1040X) if you have already filed. For additional information on this subject, refer to Tax Topic 515, Casualty, Disaster, and Theft Losses, and Publication 547, Casualties, Disasters, and Theft.

References:

• Publication 547, Casualties, Disasters, and Thefts
• Tax Topic 515, Casualty, Disaster, and Theft Losses

I gave my friend a loan to do business, but the business went bankrupt and she did not pay me back. Can I deduct this bad loan?

If someone owes you money that you cannot collect, you have a bad debt. Bad debts are deductible only if the amount owed has been previously included in your income. For a discussion of what constitutes a valid debt, see Publication 535, Business Expenses and Publication 550, Investment Income and Expenses . If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for expected income you have not received, since it was never included in your income. There are two kinds of bad debts - business and nonbusiness.

A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and that the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due.

A nonbusiness bad debt is reported on Form 1040, Schedule D (PDF) , Capital Gains and Losses, as a short-term capital loss. It is subject to the capital loss limit of $3,000 per year. This limit is $1,500 if you are married filing a separate return. A nonbusiness bad debt requires a separate detailed statement attached to the schedule D. For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses . For more information on business bad debts, refer to Publication 535, Business Expenses .

References:

• Publication 535, Business Expenses
• Publication 550, Investment Income and Expenses
• Form 1040, Schedule D (PDF), Capital Gains and Losses

Is the state sales tax paid on the purchase of an automobile an allowed deduction?

State and local sales tax paid on personal items is no longer an allowable itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions. If the auto is a business asset it is generally added to the basis and recovered through depreciation.

References:

• Publication 17, Your Federal Income Tax (For Individuals)
• Publication 535, Business Expenses

Are excise taxes for a vehicle deductible?

It has to be a personal property tax, not an excise tax, in order to deduct it. Deductible personal property taxes are only those based on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. To be deductible, the tax must be charged to you and must have been paid during your tax year. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions.

References:

• Publication 17, Your Federal Income Tax (For Individuals)
• Form 1040, Schedule A (PDF), Itemized Deductions