Taxes: Deductible-wrangling can be all math, no payoff

Denver Post writes: Is this item deductible? Should I take the standard deduction or itemize? Will taking out a home mortgage or donating a battered car to charity really improve my tax situation?

If you're new to the itemized deduction form, also known as Schedule A — maybe you bought a house last year, or sent a child to college, or had big medical expenses — you may have to tackle a lot of unfamiliar concepts as you face your 2014 taxes.

Experienced Schedule-A wranglers, however, will find little to get excited about.

"There's really nothing dramatically new this year" in terms of deductions, says David Block, an enrolled agent at TaxMaster Financial Services Corp. in New York.

Congress renewed some deductions that were slated to expire late in the year, including deductions for mortgage-insurance premiums and the ability to donate a rollover IRA to charity.

Unfortunately, the only way to find out whether itemizing will benefit you is to actually do the math. That's a disappointing truth for the taxpayer who loses a Saturday adding up doctor bills and charitable contribution receipts, only to discover that his or her Schedule A total is smaller than the standard deduction.

And you may find yourself in this situation. Standard-deduction amounts have been rising in recent years. For 2014, the standard deduction for single and married-filing-separately status is $6,200. Married-filing-jointly status carries a $12,400 standard deduction, and head of household gets you $9,100.

One of the biggest changes for 2014: For the first time, the federal government will recognize legal same-sex marriages for tax purposes. Couples that are "legally married in jurisdictions that recognize their marriages" will be treated as married "for all federal tax purposes where marriage is a factor," including filing status and taking the standard deduction, according to the IRS.

Deductions with thresholds

Along with the big threshold of standard-deduction-or-itemize, many categories of deductions come with a threshold.

For example: Medical expenses are deductible if they exceed 10 percent of your Adjusted Gross Income, or AGI, or 7.5 percent if you're 65 or older. So, if your AGI is $50,000, you can't deduct the first $5,000 in documented medical expenses. Having $4,950 in medical expenses does you no good whatsoever, no matter how scrupulously you document them.

And miscellaneous deductions for such categories as investment-related expenses and appraisal fees must surpass 2 percent of your AGI.

Where it gets sticky: This category includes "job-related expenses," loosely defined as the things you need to do your job that your company won't pay for: uniforms, union dues, classroom supplies that teachers buy out of their own pockets.

Trouble is, that section of the Internal Revenue Code "is as clear as mud," Block says. It reads: "all the ordinary and necessary expenses paid and incurred in carrying on a trade or business."

"It's extremely vague and amorphous," Block says.

Taxpayers can get into trouble by deducting items that the IRS believes their employers should have paid for (or, perhaps, did pay for). Home-office expenses for an employee, unreimbursed mileage and tools can raise a red audit flag.

"They will ask, 'Why did you pay for this instead of your employer?' " Block says. Documentation helps here.

Deductions vs. credits

Deductions differ from credits in one important way. Deductions reduce your adjusted gross income, thus lowering your tax liability. But credits reduce the amount of tax you owe, dollar for dollar.

That's a distinction that could be worth thousands of dollars. For example, tuition and school fees have long been deductible on Schedule A. But two tax credits that originated during the Obama administration — the American Opportunity Tax Credit, now extended through the end of 2017, and the Lifetime Learning Credit — are a better deal for most people.

The American Opportunity Tax Credit, which can be claimed on tuition and fees, also can be claimed on other related expenses — books, supplies and equipment — even if they're not paid directly to the school (books bought at an off-campus bookstore, for example). Room and board, insurance, medical expenses and transportation aren't included. You can claim up to $2,500; and there's an income cap of $80,000 single/$160,000 joint modified AGI. You can now claim the credit for four years, rather than the two under the previous Hope Credit. If the credit is more than the tax you owe, you may get a refund of up to 40 percent of the overage.

The Lifetime Learning Credit applies to courses that were for acquiring or improving job skills, not just degree programs. The modified AGI to qualify is a bit lower, and course materials aren't deductible.

You'll need to choose between deducting and taking the credit. But the most expensive item in a student's bookbag — the laptop — can be included in the total you claim for the AOTC, if it's required for course work.