Continuing our conversation of what tax forms to expect, let’s discuss expenses and tax deductions. Here are some documents you should begin gathering to support the most common tax deductions and expenses.
Income Tax Expenses and Tax Deductions
While all types of income are taxable unless specifically exempted by the IRS, the government does allow certain expenses to be deducted from your total income to determine your taxable income. There are also some tax credits available to either incentivize certain behaviors or to benefit certain groups of individuals.
Here is a sampling of some of the most common forms you may receive that help support income tax deductions or credits.
Most Common Tax Forms for Expenses and Deductions
1098 Mortgage Interest Statement
A 1098 Mortgage Interest Statement reports interest paid by borrowers, mortgage insurance premiums, and points paid to the lender during the year. This form may be used to provide the information for certain deductions such as mortgage interest. Two items to note regarding the 1098 form are: the form is not required if the interest paid is less than $600, and assuming that the interest paid meets the threshold, you should receive a separate 1098 for each mortgage.
1098-E Student Loan Interest
If you paid $600 or more in student loan interest to a lender, you should expect to receive a 1098-E from the lender. The student loan interest you paid may be deductible depending on your filing status, Modified Adjusted Gross Income, and whether you were responsible for making the loan payments. If you don’t receive a 1098-E because the student loan interest you paid was less than $600, remember to provide your tax preparer information on your payments, including the interest paid.
1098-T Tuition Statement
If you paid qualified tuition and expenses or received scholarships or grants from an educational institution, you (or the student) should expect to receive a 1098-T form. This form reports the amount of qualified tuition and fees paid, the amount of any scholarships or grants, the amount of any insurance refund, and the student’s status. This information may be used to potentially qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit.
Other Statements and Receipts
While not specifically a tax form, if you and your spouse (if married) worked during the year, you’ll want to gather receipts for childcare expenses paid during the year. If the childcare expenses were incurred so that you could work or look for work, then you may qualify for the dependent care credit.
If you made charitable contributions during the year, gather the receipts or letters associated with these donations. Note that these documents must be “contemporaneous”; in other words, they must be issued at the time of the donation. In some cases, you will have been given a receipt. In other cases, you may receive a letter thanking you for the donation. Assuming that the donation recipient was a qualifying charity, you may be able to deduct your donation on your tax return.
Medical and Dental Expenses
If you had significant medical expenses during the year, you may be eligible to deduct those medical expenses that exceed 7.5% of your adjusted gross income. There is a lengthy list of expenses that qualify (see IRS Publication 502). However, certain expenses, such as those for cosmetic surgery that were not due to congenital abnormality, accident, or disease, are not deductible. In addition, the IRS does not allow “double-dipping.” Therefore, if you used tax-advantaged dollars to pay the expense, such as funds from an FSA or HSA, you cannot deduct them again as part of the medical expense deduction. Keep in mind that to take the medical expense deduction, you’ll need to itemize your deductions rather than take the standard deduction.
Personal Property Tax and Real Estate Tax
If you paid Personal Property Tax or Real Estate Tax during the year, you may be able to deduct these payment amounts on your federal income tax return. If you have a mortgage, your real estate tax paid may be reported to you at the same time as your 1098. Otherwise, you can contact your local taxing authority (town or county) to get records of the amounts and dates of your tax payments. Again, you must itemize your deductions to take advantage of this deduction. And you are limited to $10,000 in state and local tax deductions; this includes any state or local income tax along with your real estate and property taxes.
Energy Efficient Home Improvement Credit, Clean Vehicle and Energy Credits, Residential Clean Energy Credit
Each of these credits has different qualifications, including the degree of energy efficiency, the expected life of the improvement or vehicle, and other factors. However, you’ll want to gather your receipts and any additional pertinent information for your tax preparer because these tax credits can be valuable if you qualify.
Forms provide part of the picture
As we said above, preparing your tax return is your opportunity to tell the IRS how you are calculating your tax liability for the year. The tax forms sent to you provide only part of the picture. Your records for items like charitable contributions and medical expenses or your business income and expenses will round out the picture. Remember, any tax form sent to you has also been sent to the IRS. If you misreport any information on your tax return that was also reported to you (and the IRS), you should expect a letter from the IRS*. And you should be able to substantiate any other information reported on your tax return with your own records, such as receipts or statements.
*Sometimes, it is necessary to take a credit or deduction that applies to you but requires an adjustment to amounts reported to the IRS. This is fine if you can substantiate your numbers. And you or your tax preparer must be prepared to defend your position in the event of an audit.
Know what to expect with Infinity Financial Strategies
When Infinity Financial Strategies manages your investment portfolio, we provide you with a detailed list of the tax forms that you should expect to receive. We provide this information in a document you can forward directly to your tax preparer.
This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.