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3.4 Itemized Deductions/Standard Deductions: Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans,
etc.)
Is the interest amount that we paid to the IRS deductible?
Interest and penalties paid to the IRS on Federal taxes are not deductible.
For more information, refer to Items You Cannot Deduct in
Chapter 25 of interest expense Publication 17, Your Federal Income
Tax for Individuals; and Tax Topic 505, Interest Expense.
References:
Can you tell me where on the Internet I can find the AFR, Applicable
Federal Rate, for the months in 2002?
The Applicable Federal
Rates for each month can be found in the first weekly Internal Revenue
Bulletin (IRB) published for that month. The Internal Revenue Bulletins are
located on the IRS.gov web-site. In the "Search IRS site
for : " box, enter "applicable federal rates index." Click on "go" and
a page with a link to AFRs will pop-up. You can access the web-site at www.irs.gov .
References:
A family member has offered me a low interest loan for purchasing
a home. Where can I find information on rates for private loans?
The rules for private or "below market" loans may be found in Publication 550, Investment Income and Expenses. To calculate the lowest
acceptable rate of interest under federal tax law, you must use the Applicable
Federal Rates (AFR) that apply based on the terms and period of your loan.
The applicable federal rates are published monthly in the Internal Revenue
Bulletin. The Internal Revenue Bulletins may be found on the IRS' web-site.
In the " search IRS site for:" box, enter "applicable federal rates
index" click on "go" and a page with a link to AFRS will pop-up. You may access
the web-site at www.irs.gov.
References:
I made a personal loan of $3,500 to a friend. She declared bankruptcy
after only paying me back $500.00. Does the IRS allow any provision for my
loss?
If, in a true debtor-creditor relationship, someone owes you money that
you cannot collect, you have a bad debt. There are two kinds of bad debts
- business and nonbusiness.
Bad debts are deductible only if the amount owed to you represents a loan
of your cash or has been previously included in your income. A business bad
debt, generally, is one that comes from operating your trade or business.
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. You may take the deduction only in the year the debt becomes
totally worthless. A debt becomes totally worthless when 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 taken as a short-term capital loss
on Form 1040, Schedule D (PDF), Capital
Gains and Losses .
For more information on bad debts, refer to Publication 550, Investment
Income and Expenses, and Publication 535, Business Expenses.
Form 1040, Schedule D (PDF), Capital
Gains and Losses.
References:
Are the legal fees incurred or paid for collection of Social Security
Benefits deductible?
Personal legal fees are not, generally, deductible. However you may deduct
legal fees incurred or paid for the production or collection of taxable income.
The portion of the legal fees that is deductible would be proportional to
the taxable part of your Social Security benefit collected. The deduction
is taken on line 22 of Form 1040 Schedule A (PDF), Itemized
Deductions , subject to the 2% of Adjusted Gross Income Limitation. For
more information, refer to Publication 529, Miscellaneous Deductions;
and Publication 915, Social Security and Equivalent Railroad Retirement
Benefits.
References:
Publication 529, Miscellaneous Deductions
Publication 915, Social Security and Equivalent Railroad
Retirement Benefits
I went through a divorce last year and paid a lot of legal fees.
Are these deductible on my tax return?
Legal fees incurred or paid for a divorce are personal in nature, and are
not generally deductible. However, legal fees incurred or paid for the production
or collection of taxable income may be deductible. You may deduct legal fees
for collecting alimony because alimony is taxable income. These deductions
are taken on line 22 of Form 1040, Schedule A (PDF), Itemized
Deductions. For additional information, refer to Tax Topic 508, Miscellaneous
Expenses , and Publication 529, Miscellaneous Deductions .
References:
Can I deduct alimony paid to my former spouse?
If you are divorced or separated, you may be able to deduct the alimony
or separate maintenance payments that you are required to make to your spouse
or former spouse, or on behalf of that spouse. For additional information,
refer to Tax Topic 452, Alimony Paid (this topic covers alimony
under decrees or agreements after 1984); and Publication 504, Divorced
or Separated Individuals .
References:
Where are fees and commissions for investments deducted?
If they are deductible, investment expenses other than investment interest
are taken as miscellaneous deductions on Form 1040, Schedule A (PDF), Itemized Deductions. These deductions must
be reduced by 2% of your adjusted gross income.
Commissions and fees for the acquisition or sale of an asset are added
to the basis of that asset and are not deductible. For example, acquisition
fees, sales commissions, and load charges paid in connection with the purchase
or selling of mutual fund shares are not deductible. They can usually be added
to the basis of the shares.
Fees for managing investments, such as custodial fees and management fees,
are deductible. Fees you pay a broker to collect taxable bond interest or
stock dividends are deductible. Fees that pass through to you from non-publicly
offered mutual funds, partnerships, or trusts are deductible. All of these
fees are subject to the 2% limit. For more information, refer to Publication 529, Miscellaneous Deductions; Publication 550, Investment
Income and Expenses; and Publication 564, Mutual Fund Distributions.
References:
Is a real estate investment considered investment property? Is the
interest deductible as investment interest if you cannot deduct it as mortgage
interest?
If you borrow money and use it to buy property you hold for investment,
the interest you pay is deductible as investment interest subject to certain
limits. However, you cannot deduct interest you incurred to produce tax-exempt
income. Investment interest does not include any qualified home mortgage interest
or any interest taken into account in computing income or loss from a passive
activity. For more information, refer to, Publication 550 Investment
Income and Expenses; Tax Topic 505, Interest Expense;
and Publication 925, Passive Activity and At-Risk Rules.
References:
We took a margin loan from our investment money market account.
Can the interest we paid be deducted?
If you are a cash method taxpayer, you can deduct interest on margin accounts
to buy taxable securities as investment interest in the year you pay it. You
are considered to have paid interest on these accounts only when you actually
pay the broker or when payment becomes available to the broker through your
account. Payment may become available to the broker through your account when
the broker collects dividends or interest for your account, or sells securities
held for you or received from you. You cannot deduct any interest on money
borrowed for personal reasons. Investment interest deductions are limited
to the extent of investment income. The deductions amount is reported on Form 4952 (PDF), Investment Interest Deduction.
The deduction is then taken as an itemized deduction on line 13 of Form 1040, Schedule A (PDF), Itemized Deductions.
For more information, refer to Publication 550, Investment Income
and Expenses.
References:
If I don't itemize my deductions can I still deduct my investment
expenses such as margin interest?
Investment expenses for individuals must be taken as itemized deductions.
Investment expenses (other than interest expenses) are deducted on Form 1040, Schedule A (PDF), Itemized Deductions,
as miscellaneous deductions subject to the 2% of your Adjusted Gross Income
(AGI) limit. Investment Interest, such as margin interest, is reported on Form 4952 (PDF) , Investment Interest Deduction,
and on Form 1040, Schedule A Itemized Deductions, but is not subject to the
2% of your Adjusted Gross Income (AGI) limit. For more information, refer
to Publication 550, Investment Income and Expenses; Publication 529, Miscellaneous Deductions; and Tax Topic 508, Miscellaneous
Expenses.
References:
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:
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