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Tue December 25, 2012
The Finale Of '12 Days Of Tax Deductions'
Originally published on Tue December 25, 2012 7:42 am
DAVID GREENE, HOST:
Now each day we've been looking at those gifts - big and small - that the government gives us in the form of tax benefits and we have finally hit the final day in our series that we've called the Twelve Days of Tax Deductions.
(SOUNDBITE OF SONG, "TWELVE DAYS OF CHRISTMAS")
GREENE: And so on this 12th day of tax deductions, we thought we would just dig into a grab bag of a lot of deductions you may or may not even know about.
Kevin McCormally follows this. He's tax editorial director of Kiplinger's Personal Finance Magazine. And Kevin, thanks for dropping by.
KEVIN MCCORMALLY: I'm happy to be here.
GREENE: So I have to say this, as we've been researching the series that we've been doing, there are a few deductions that just caught my eyes, ones I didn't expect, and one is a tax deduction for gambling losses?
MCCORMALLY: Well, it's there, but it's sort of misleading.
MCCORMALLY: Because first of all, you only get to deduct your losses if you report your winnings...
MCCORMALLY: ...and only up to the level of your winnings. So if you win $5,000 and honestly report that $5,000, you can deduct $5,000, but only if you itemize deductions. Three quarters of the people don't itemize. They're still expected to report their winnings but they don't get to deduct their losses.
GREENE: OK. So if I go on a weekend in Vegas and lose a ton, it's not like I can kind of make the losses a little better by deducting it.
MCCORMALLY: Uncle Sam doesn't really want to subsidize that.
GREENE: Yeah. I guess I can understand that. Well, you have a list of deductions that are often overlooked - and I wanted to get to some of them - but what is for students who are paying student loans.
MCCORMALLY: Well, remember that back in 1986, the last big tax reform, they pretty much eliminated the deduction for personal interest except for home mortgages. But then after a while they decided, well, we really ought to help these kids out who have to borrow all this money, so we'll let them deduct interest on their student loans. But then they discovered that a lot of these kids can't get jobs and to go to their parents and ask their parents to pay that interest. Well, until a few years ago, if the parents paid the interest they could not deduct it, because one of the requirements in the law is you have to be legally obligated to repay that interest for it to be a deduction.
GREENE: And so parents are not legally obligated, it's the student who is legally obligated.
MCCORMALLY: Right. They usually don't cosign the loan so, it's the student. But finally, the IRS said let's play like we're in the real world and pretend that the parents give the money to the student, the student pays the interest, so the student gets the deduction. That's great, as long as the student is no longer a dependent on the parent's tax return. If he or she is still a dependent, nobody gets the deduction.
GREENE: Well, this raises an interesting question and I think could apply to a lot of these deductions. If I'm a student and my parents are paying off my loan and are eligible for this deduction, is there anything I have to do before December 31st to make sure that mom and dad can get this?
MCCORMALLY: Make sure they pay the debt, that's the key thing.
GREENE: Make sure they pay and then they can...
MCCORMALLY: Like most deductions, it has to be done by December 31st in order to get it on your 2012 return.
GREENE: Now one group of people who pay very close attention to possible deductions are those people who are self-employed. It seems like there are a lot of options.
MCCORMALLY: Well, they are and that's one reason that a lot of people become self-employed. One thing that's very interesting to me is the ones with medical health insurance. If you're an individual working for somebody else and have to pay for your own insurance, you can deduct it, but it's a medical expense deductible only to the extent that all your medical expenses exceed seven and a half percent of your income. Very, very few people reach that threshold. Thankfully, we don't have that necessary as medical problems.
MCCORMALLY: But if you're self-employed, you can deduct your health insurance costs on your 1040 form with no restriction at all, no threshold. And more importantly, an individual has to do it, they have to itemize in order to get this deduction. A business person does not, they get that deduction right on their 1040.
GREENE: A lot of things on a self-employed person's life. I mean even, I mean if they want to throw a party or something for New Year's Eve. If it's business related, they could deduct their champagne.
KENNETH TURAN. MOVIE CRITIC, LOS ANGELES TIMES: Absolutely. I know lots of my friends who are freelancers do just that. They have a party on New Year's Eve, they invite sources and they claim it as a tax deduction. You've got to be careful. It has to be reasonable and ordinary. There should be a business purpose that you can prove if the IRS questions it. But, sure, a lot of self-employed people are very generous at this time of year - gifts that you give to clients, up to $25 deductible at holiday time.
GREENE: And for a lot of people traveling this time of year, baggage fees. I mean, I hate them. A lot of people hate them.
GREENE: Is there any way to deduct those?
MCCORMALLY: You're self-employed and you're traveling on business, that's $50 a bag or whatever, you can add it to your travel expenses. You might not think it's reasonable or ordinary but the IRS does.
GREENE: Well, that's kind of the IRS.
GREENE: Thanks so much for joining us. I really appreciate. And have a great holiday.
MCCORMALLY: Thank you.
GREENE: That's Kevin Mccormally, he's editorial director of Kiplinger's Personal Finance Magazine. Transcript provided by NPR, Copyright National Public Radio.