The wealthy often pay a low percentage of their income in taxes, because they can afford to hire the best tax experts. These experts are often knowledgeable about provisions in the tax code that allows for tax write-offs and deductions with which a lay person might be unfamiliar. If you cannot afford the services of tax experts, you can still benefit from these provisions by developing an understanding of the requirements that apply. The following are a few that are often overlooked:
Nonbusiness Bad Debts
If you make a personal nonbusiness loan and you are unable to collect the amount, you may be able to claim a deduction for the amount for the year that the debt becomes completely worthless. This does not apply to amounts that can be considered gifts instead of loans, and as such, there must be evidence that there was an understanding between you and the borrower that the amount was expected to be repaid. For instance, a written enforceable agreement, outlining the repayment terms of the loan. This provision is limited to amounts in which you have basis because it was included in your income. Other nonbusiness bad debts for which you may be eligible to claim a deduction include:
Mechanics’ and Suppliers’ Liens
This applies if you paid off a lien placed against your property by material suppliers because of debts owed by a builder or contractor, and you made the payment so as to avoid foreclosure and loss of your property. If you are unable to get repayment from the builder or contractor, you can take a bad debt deduction for the amount.
Insolvency of Contractor
Amounts that you paid as a deposit to a contractor which has since become insolvent are deductible if you are unable to recover your deposit.
Secondary Liability on Home Mortgage
You may be eligible to take a bad debt deduction for amounts that you paid to satisfy a mortgage, if:
- You entered a transaction wherein someone assumes your mortgage, instead of the home being sold outright
- you remain secondarily liable for repayment of the mortgage,
- the buyer defaults on the loan,
- the house is sold for less than the amount outstanding on the mortgage,
- you paid the difference between the sale price and the outstanding mortgage amount and
- you are unable to collect the amount you paid from the buyer.
Be sure to keep track of any future repayments that you receive for nonbusiness bad debts for which you claimed a deduction, as you may be required to include those amounts in your income.
Damages for Breach of Employment Contract
If you paid a former employer damages, because you broke an employment contract, you can deduct that payment if it is attributable to the pay you received from that employer.
If you paid dues to professional organizations, for which the memberships help you to carry out your job, you may be able to deduct those amounts. This includes, chambers of commerce, bar associations, medical associations, boards of trade, business leagues, real estate boards and trade associations. To learn more, check out An Overview Of Itemized Deductions.
Depreciation of Computer Required for Work
If you own a computer that is used for the convenience of your job, and the computer is required as a condition of employment, it may be eligible for a depreciation deduction. Be careful here, as using a computer for your convenience, such as you taking home work that you would prefer not to do at the office so you can leave earlier, is not usually considered to be ‘required as a condition of your employment.’ In general, the computer must be necessary for you to perform your duties as an employee.
The Bottom Line
There are many other tax deductions that are often overlooked, which usually result in individuals paying more income tax than required. You can pay the least amount of tax required by doing some research on allowed deductions. A good place to start is the IRS website. Also, if you can afford it, use the services of a competent tax professional.
More From Investopedia
- Banks Will Be Under More Stress In 2012
- How FICO Scores Are Calculated
- How To Stage Your Home To Sell