Tax Deductions By Category

If you paid someone to care for a qualifying individual so you (and your spouse if you are married) could work or look for work, you may be able to claim the credit for child and dependent care expenses. If you are married, both you and your spouse must have earned income, unless one spouse was either a full–time student or was physically or mentally incapable of self–care. The expenses you paid must have been for the care of one or more of the following qualifying individuals:

1. Your dependent (under the rules for qualifying child) who was under age 13 when care was provided. For certain custodial parents, refer to Child of Divorced or Separated Parents in Publication 503 , Child and Dependent Care Expenses. A noncustodial parent, however, cannot treat a child as a qualifying person even if the parent may claim the child as an exemption. 2. Your spouse who was mentally or physically not able to care for himself or herself and who has the same principal place of abode as you for more than one-half of the year. 3. Your dependent who was physically or mentally not able to care for himself or herself, for whom you can claim an exemption, and who has the same principal place of abode as you for more than one-half of the year.

In addition to the conditions just described, to take the credit, you must meet all the following conditions:

1. You must provide the taxpayer identification number (usually the social security number) of the qualifying person. 2. Your filing status must be a status other than married filing separate (You must file a joint return if you are married.) 3. The payments for care cannot be paid to someone you can claim as your dependent, or to your child who is under age 19 even if he or she is not your dependent. 4. You must report the name, address, and taxpayer identification number, (either the social security number, or the employer identification number) of the care provider on your return. If the care provider is tax exempt, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider. If you do not provide information regarding the care provider, you may still be eligible for the credit if it is shown that you exercised due diligence in attempting to provide the required information.

If you qualify for the credit, complete Form 1040A, Schedule 2 (PDF), or Form 2441 (PDF) with Form 1040 (PDF). If you received dependent care benefits from your employer (this amount should be shown on your Form W-2 (PDF)), you must complete Part III of Schedule 2 (Form 1040A) or Form 2441. You cannot use Form 1040EZ if you claim the child and dependent care credit.

The credit is a percentage, based on your adjusted gross income, of the amount of work–related child and dependent care expenses you paid to a care provider. There is a maximum dollar limit of dependent care expenses you can use for this credit. The amount of the maximum dollar limit depends on the taxable year and the number of qualifying children. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income. Refer to Publication 503, Child and Dependent Care Expenses, for additional information.

If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, refer to Publication 926, Household Employer's Tax Guide, or to Topic 756.

IRS Tax Tip 2008-46

If you paid someone to care for a child under age 13 or a qualifying spouse or dependent so you could work or look for work, you may be able to reduce your tax by claiming the Child and Dependent Care Credit on your federal income tax return. To qualify, your spouse, children age 13 or older, and other dependents must be physically or mentally incapable of self-care.

The credit is a percentage of the amount of work-related child and dependent care expenses you paid to a care provider. The credit can be up to 35 percent of your qualifying expenses, depending upon your income.

For 2007, you may use up to $3,000 of the expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income.

To claim the credit for child and dependent care expenses, you must meet certain conditions including:

• Income - You must have earned income from wages, salaries, tips, other taxable employee compensation, or net earnings from self-employment (one spouse may be considered as having earned income if they were a full-time student or physically or mentally not able to care for himself or herself)• Payee - The payments for care cannot be paid to someone you can claim as your dependent on your return or to your child who is under age 19, even if he or she is not your dependent• Filing Status - Your filing status must be single, married filing jointly, head of household, or qualifying widow(er) with a dependent child• Care - The care must have been provided for one or more qualifying persons• Home - The qualifying person must have lived with you for more than half of 2007

There are some limitations on the amount of credit you can claim. If you received dependent care benefits from your employer, other rules apply.

For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses. You may download these free publications from IRS.gov or order them by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

Publication 503, Child and Dependent Care Expenses (PDF 167K)

Form W-10, Dependent Care Provider’s Identification and Certification (PDF 31K)

Form 2441, Child and Dependent Care Expenses (PDF)

Form 2441 Instructions (PDF 32K)

Publication 17, Your Federal Income Tax (PDF 2,075K)

Tax Topic 602

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If you itemize your deductions on Form 1040, Schedule A (PDF), you may be able to deduct expenses you paid that year for medical care (including dental) for yourself, your spouse, and your dependents.

A deduction is allowed only for expenses paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. The cost of drugs is deductible only for drugs that require a prescription, except for insulin.

Medical expenses include fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and Christian Science practitioners.

Also included are payments for hospital services, qualified long–term care services, nursing services, and laboratory fees. Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction are also deductible medical expenses.

You may include amounts you paid for participating in a smoking–cessation program and for drugs prescribed to alleviate nicotine withdrawal. However, you may not deduct amounts paid for nicotine gum and nicotine patches, which do not require a prescription. You may deduct the cost of participating in a weight-loss program for a specific disease or diseases, including obesity, diagnosed by a physician.

You may not deduct the cost of purchasing diet food items. In addition, you may include expenses for admission and transportation to a medical conference relating to the chronic disease of yourself, your spouse, or your dependent (if the costs are primarily for and essential to the medical care). However, you may not deduct the costs for meals and lodging while attending the medical conference.

The cost of items such as false teeth, prescription eyeglasses or contact lenses, laser eye surgery, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf are deductible medical expenses.

You may not deduct funeral or burial expenses, health club dues, over–the–counter medicines, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of your health, or most cosmetic surgery.

You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance can be deducted.

If you use your car for medical transportation, you can deduct actual out–of–pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses. With either method you may include tolls and parking fees.

You may include in medical expenses the incidental cost of meals and lodging charged by the hospital or similar institution if your main reason for being there is to receive medical care.

You can only include the medical expenses you paid during the year, regardless of when the services were provided. Your total medical expenses for the year must be reduced by any reimbursement.

It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

You may include qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement.

If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child.

You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person didn't meet the gross income or joint return test.

You may deduct only the amount by which your total medical care expenses for the year exceed 7.5% of your adjusted gross income. You do this calculation on Form 1040 Schedule A in computing the amount deductible.

Medical expenses include insurance premiums paid for accident and health or qualified long-term care insurance. You may not deduct insurance premiums for life insurance, for policies providing for loss of wages because of illness or injury, or policies that pay you a guaranteed amount each week for a sickness.

In addition, the deduction for a qualified long–term care insurance policy's premium is limited. Refer to Publication 502 , Medical and Dental Expenses.

You may not deduct insurance premiums paid by an employer–sponsored health insurance plan (cafeteria plan) unless the premiums are included in Box 1 of your Form W-2 (PDF).

If you are self–employed and have a net profit for the year, or if you are a partner in a partnership or a shareholder in an S corporation, you may be able to deduct, as an adjustment to income, 100% of the amount you pay for medical insurance for yourself and your spouse and dependents.

You can include the remaining premiums with your other medical expenses as an itemized deduction. You cannot take the special 100% deduction for any month in which you are eligible to participate in any subsidized health plan maintained by your employer or your spouse's employer.

My father is in a nursing home and I pay for the entire cost. Can I deduct the expenses on my tax return?

Nursing home expenses are allowable as medical expenses in certain instances. If you, your spouse, or your dependent is in a nursing home, and the primary reason for being there is for medical care, the entire cost, including meals and lodging, is a medical expense.

If the individual is in the home mainly for personal reasons, then only the cost of the actual medical care is a medical expense, and the cost of the meals and lodging is not deductible.

To determine if your father qualifies as your dependent for this purpose, refer to Publication 502, Medical and Dental Expenses.

You deduct medical expenses on Form 1040, Schedule A (PDF), Itemized Deductions. The total of all allowable medical expenses must be reduced by 7.5% of your Adjusted Gross Income.

Publication 502, Medical and Dental Expenses, contains additional information.

There are four types of deductible nonbusiness taxes:

State, local and foreign income taxes;

Real estate taxes;

Personal property taxes; and

State and local sales taxes.

To be deductible, the tax must be imposed on you and must have been paid during your tax year. However, tables are available to determine your state and local general sales tax amount. Refer to Form 1040 Instructions for more information. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A (PDF).

State and local income taxes withheld from your wages during the year appear on your Form W-2 (PDF). The following amounts are also deductible:

Any estimated taxes you paid to state or local governments during the year, and

Any prior year's state or local income tax you paid during the year.

Generally, you can take either a deduction or a tax credit for foreign income taxes imposed on you by a foreign country or a United States possession.

For information regarding the foreign tax credit, refer to Topic 856. As an employee, you can deduct mandatory contributions to state benefit funds that provide protection against loss of wages. Refer to Publication 17 for the states that have such funds.

Deductible real estate taxes are generally any state, local, or foreign taxes on real property. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value.

Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, you can increase the cost basis of your property by the amount of the assessment.

Refer to Publication 551, Basis of Assets, for more information. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.

If a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account.

Only deduct the amount actually paid out of the escrow account during the year to the taxing authority.

Deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.

Taxes and fees you cannot deduct on Schedule A include Federal income taxes, social security taxes, stamp taxes, or transfer taxes on the sale of property, homeowner's association fees, estate and inheritance taxes and service charges for water, sewer, or trash collection.

You may be subject to a limit on some of your itemized deductions including nonbusiness taxes. Please refer to the Form 1040 Instructions for the limitations based on the adjusted gross income.

Generally, sales taxes are not deductible on Schedule A. However, for Tax Years 2005, 2006 and 2007, if you file a Form 1040 and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes (You can't claim both).

If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount. If you didn't save all your receipts, you can choose to claim a standard amount for state and local sales taxes.

Its easy if you use the Sales Tax Deduction Calculator on IRS.gov for either year (refer to Publication 600 and Form 1040 Instructions).

For more information on nonbusiness deductions for taxes, refer to Publication 17.

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Interest is an amount you pay for the use of borrowed money. To deduct interest you paid on a debt you must be legally liable for the debt.

Additionally, you generally must itemize your deductions, unless the interest is on rental or business property or on a student loan.

If you prepay interest, you must allocate the interest over the tax years to which it applies. You may deduct in each year only the interest that applies to that year.

However, there is an exception that applies to points paid on a principal residence.

The types of interest you can deduct as itemized deductions on Form 1040, Schedule A (PDF) are investment interest and home mortgage interest, including certain points. For information on points, refer to Topic 504 .

You can deduct student loan interest on Form 1040 (PDF) or Form 1040A (PDF). For information on deducting student loan interest, refer to Topic 456.

Home mortgage interest is interest you pay on a loan secured by your main home or a second home. The loan may be a mortgage to buy your home, a second mortgage, a home equity loan, or a line of credit.

Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking and toilet facilities.

A second home can include any other residence you own, and treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as home mortgage interest.

Home mortgage interest and points are generally reported to you on Form 1098 (PDF), Mortgage Interest Statement, by the financial institution to which you made the payments.

If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on these mortgages:

1. A mortgage you took out on or before October 13, 1987 (grandfathered debt.) 2. Mortgages taken out after October 13, 1987, to buy, build, or improve your home, (called home acquisition debt) but only if this debt plus any grandfathered debt totals $1 million or less throughout 2007. The limit is $500,000 if you are married filing separately.

3. Any mortgages taken out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if these mortgages total $100,000 or less throughout 2007, and all mortgages, including any grandfathered debt and home acquisition debt, on the home, total no more than your homes fair market value. The limit is $50,000 if you are married filing separately.

If one or more of your mortgages does not fit into any of these categories, refer to Publication 936, Home Mortgage Interest Deduction, to figure the amount of interest you can deduct.

You may be able to take a credit against your federal income tax if you were issued a mortgage credit certificate by a state or local government for low income housing. Use Form 8396 (PDF), Mortgage Interest Credit, to figure the amount. For further information, please refer to Publication 530, Tax Information for First Time Homeowners.

You cannot deduct personal interest. Personal interest includes interest paid on a loan to purchase a car for personal use, credit card and installment interest incurred for personal expenses. Items you cannot deduct as interest include points (if you are a seller), service charges, credit investigation fees, and interest relating to tax–exempt income, such as interest to purchase or carry tax–exempt securities.

You may be subject to a limit (phaseout) on some of your itemized deductions including mortgage interest. For more information on the limitations based on the adjusted gross income please refer to the Form 1040 Instructions.

I took out a home equity loan to pay off personal debts. Is this interest deductible? Where do I enter this amount on my tax return?

A loan taken out for reasons other than to buy, build, or substantially improve your home, such as to pay off personal debts may qualify as home equity debt.

The interest would be deducted on Form 1040, Schedule A (PDF), Itemized Deductions. The amount you can deduct as interest on home equity debt is subject to certain limitations. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?

Unless you have begun construction of a home on the bare land that you can occupy within 24 months the interest you paid on the second mortgage would not qualify as deductible mortgage interest. . For more information, refer to Publication 936, Home Mortgage Interest Deduction.

Is the mortgage interest and property tax on a second residence deductible?

The mortgage interest on a second home which you use as a residence for some portion of the taxable year, is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence.

Real estate taxes paid on your primary and second residence are, generally, deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare.

Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property. For more information, refer to Publication 17, Your Federal Income Tax for Individuals, Chapter 24; Tax Topic 503, Deductible Taxes; and Publication 530, Tax Information for First-Time Home Owners.

Home Mortgage Points

The term "points" is used to describe certain charges paid to obtain a home mortgage. Points may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF). If you can deduct all of the interest on your mortgages, you may be able to deduct all of the points paid on the mortgage. For more information on deducting interest, refer to Topic 505.

You can deduct the points in full in the year they are paid, if all the following requirements are met:

1. Your loan is secured by your main home (your main home is the one you live in most of the time).

2. Paying points is an established business practice in your area.

3. The points paid were not more than the amount generally charged in that area.

4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.

5. The points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.

6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.

7. You use your loan to buy or build your main home.

8. The points were computed as a percentage of the principal amount of the mortgage, and

9. The amount is clearly shown on your settlement statement.

Points that do not meet these requirements may be deductible over the life of the loan. Points paid for refinancing generally can only be deducted over the life of the new mortgage.

However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated previously, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees are not interest and cannot be deducted.

Points paid by the seller of a home cannot be deducted as interest on the seller's return, but they are a selling expense which will reduce the amount of gain realized. Points paid by the seller may be deducted by the buyer provided the buyer subtracts the amount from the basis, or cost, of the residence. Points you pay on loans secured by your second home can be deducted only over the life of the loan.

You may be subject to a limit on some of your itemized deductions, including points; for more information on the adjusted gross income limitations please refer to the Form 1040 Instructions.

For more information on points, refer to Publication 936, Home Mortgage Interest Deduction.

If I must deduct points over the life of my mortgage, and I have a 30 year mortgage, does this mean that I divide the points paid by 30 and enter that amount on Schedule A?

No, you don't divide the points by 30. If you choose to use the straight-line method, you need to divide the points by the number of payments over the term of the loan and deduct points for a year according to the number of payments made in the year.

If the loan ends prematurely, due to payoff or refinance with a different lender, for example, then the remaining points are deducted in that year.

Points not included in Form 1098 (PDF) (usually not included on a refinance) should be entered on Form 1040, Schedule A (PDF), Itemized Deductions. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.

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A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.

If your property is not completely destroyed, or if it is personal-use property, determine your loss from a casualty by first figuring the decrease in fair market value of your property as a result of the casualty event.

To determine the fair market value of your property, refer to Topic 703. Keep in mind the general definition of fair market value is the price at which property would change hands between a buyer and seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

If the property was held by you for personal use, you must further reduce your loss by $100. This $100 reduction for losses of personal-use property applies to each casualty or theft event that occurred during the year.

The total of all your casualty and theft losses of personal-use property must be further reduced by 10% of your adjusted gross income.

For more information regarding casualty losses of personal-use property and how to deduct them, refer to Topic 507 and Publication 547, Casualties, Disasters, and Thefts.

I am in a disaster area and heard the IRS could help me. What can the IRS do?

If you have been affected by a Presidentially declared disaster, the IRS may help you by allowing additional time for filing returns and making payments, and in some circumstances, waiving penalties if the disaster has caused you to file or pay late.

The IRS may also, provide copies or transcripts of previously filed returns, free of charge. You may be eligible to file for a casualty loss deduction on the prior year's tax return, or if you have already filed, by amended return (Form 1040X).

For additional information on this subject, refer to Tax Topic 515, Casualty, Disaster, and Theft Losses, and Publication 547, Casualties, Disasters, and Theft.

FILING SEPARATELY

My spouse and I are filing separate returns. How can we split our itemized deductions?

If you and your spouse file separate returns and one of you itemizes deductions, the other spouse will have a standard deduction of zero. Therefore, the other spouse should also itemize deductions.

You may be able to claim itemized deductions on a separate return for certain expenses that you paid separately or jointly with your spouse. Deductible expenses that are paid out of separate funds, such as medical expenses, are deductible by the spouse who pays them.

If these expenses are paid from community funds, the deduction may depend on whether or not you live in a community property state. In a community property state, the deduction is, generally, divided equally between you and your spouse.

For more information refer to Publication 504, Divorced or Separated Individuals; and Publication 555, Community Property.

Our home was seriously damaged by flooding last year. Are there special provisions for claiming a loss since our home is located in a declared disaster area?

Casualty losses not compensated for by insurance or otherwise are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in an area that is officially designated by the President of the United States as eligible for federal disaster assistance, you can choose to deduct that loss on your return for the year immediately preceding the loss year.

In other words, you may treat the loss as having occurred in either the current year or the previous year, whichever provides the best tax results for you.

If you have already filed your return for the preceding year, the loss may be claimed by filing an amended return, Form 1040X (PDF), Amended U.S. Individual Income Tax Return.

For more information on disaster area losses (including flood losses), refer to Tax Topic 515, Disaster Area Losses (Including Flood Losses), or Publication 547, Casualties, Disasters and Thefts. Publication 584, Casualty, Disaster, and Theft Loss Workbook, can be used to help you catalog your property.

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Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A (PDF).

To be deductible, charitable contributions must be made to qualified organizations. See Publication 526, Charitable Contributions.

If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

For a contribution of cash, check, or monetary gift (regardless of amount), you must maintain as a record of the contribution either a bank record or a written communication from the qualified organization.

You generally can deduct the fair market value of any property you donate, as well as your cash contributions, to qualified organizations. See Publication 561, Determining the Value of Donated Property.

For any contribution of $250 or more (including contributions of property), you must obtain a contemporaneous written acknowledgment from the qualified organization. One document may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgement requirement for all contributions of $250 or more.

You must fill out Form 8283 (PDF) Section A, if your total deduction for all noncash contributions is more than $500. An appraisal generally must be done if you make a contribution of noncash property worth more than $5,000. In that case, you must also fill out Form 8283 Section B. Attach Form 8283 to your return.

For more information refer to Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property.

Certain employee expenses are deductible as miscellaneous itemized deductions on Form 1040, Schedule A (PDF). Miscellaneous itemized deductions are subject to a 2% limit, which means you only can deduct certain expenses to the extent that they exceed 2% of your adjusted gross income from the total amount of deductions.

For additional information, refer to the Form 1040, Schedule A&B Instructions, and Publication 529, Miscellaneous Deductions, or Publication 946, How To Depreciate Property. If you want more in-depth information about educational expenses, refer to Topic 513. For further information on employee business expenses, refer to Topic 511, and Topic 512.

Whether you are self–employed or are an employee, you may be able to deduct certain expenses for the part of your home you use for business despite the general denial of business expense deductions for the home.

To deduct expenses for business use of the home, part of your home must be used regularly and exclusively as one of the following:

1. The principal place of business for your trade or business;

2. The place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business; or

3. In connection with your trade or business, if you use a separate structure that is not attached to your home.

Where the exclusive use requirement applies, you cannot deduct business expenses for any part of your home that you use for both personal and business purposes.

For example, if you are an attorney and use the den of your home to write legal briefs and also for personal purposes, you may not deduct any business–use–of–your–home expenses.

Further, under the principal-place-of-business test, you must determine that your home is the principal place of your trade or business after considering where your most important activities are performed and most of your time is spent, in order to deduct expenses for the business use of your home.

Deductions also may be taken for regular use of a residence for the provision of day care services or for business storage purposes; exclusive use is not required in these cases. You also may take deductions if you rent out your residence. For more information, see Publication 587

Deductible expenses for business use of your home include the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. You may not deduct expenses for lawn care in general or for painting a room not used for business.

When figuring the amount you can deduct for the business use of your home, you can use the entire amount of expenses attributable solely to the portion of the home used in your business.

The amount you can deduct for expenses attributable to the whole house depends on the percentage of your home used for business. To figure this percentage, you may divide the number of square feet used for business by the total square feet in your home.

Or, if the rooms are approximately the same size, divide the number of rooms used for business by the total number of rooms in your home. You figure the business portion of your expenses by applying this percentage to the total of each expense.

If you are a qualified day-care provider who does not use any area exclusively for day care, your business portion is further limited by the ratio of the number of hours the area is used exclusively for business to the total number of hours the portion was available for any use.

If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home, other than mortgage interest, taxes, casualty losses, and the like is limited.

However, those business expenses that can not be deducted because of the gross income limitation can be carried forward to the next year but will be subject to the deduction limit for that year.

If you are in the business of farming or are an employee, use the worksheet in Publication 587 , Business Use of Your Home, (including use by daycare providers) to figure your deduction.

As an employee, you must itemize deductions on Form 1040, Schedule A (PDF) to claim expenses for the business use of your home. Farmers claim their expenses on Form 1040, Schedule F (PDF). If you are self–employed, use Form 8829 (PDF) to figure your business–use–of –the–home deductions and report those deductions on Form 1040, Schedule C (PDF).

Publication 587 has detailed information on rules for the business use of your home, including how to determine if your home office qualifies as your principal place of business.

If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method.

If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction.

Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.

To use the standard mileage rate, you must own or lease the car; the car must not be used for hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction or the special depreciation allowance on the car; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".

Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

However, for a car you lease, you must use the standard mileage rate method for the entire lease period.

For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that are after 1997.

To use the actual expense method, you must determine what it actually costs to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven.

Other car expenses for parking fees, and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.

Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986.

However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight–line depreciation over the estimated remaining useful life of the car.

There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.

The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on record keeping, refer to Topic 305.

If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan requirements, the reimbursements should not be included in your wages on your Form W-2 (PDF), and you should not deduct the expenses.

If your employer uses a non–accountable plan to reimburse you for the expenses, the reimbursements are includable in your wages.

Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non–accountable plan with your wages, salary, or other compensation and report the total on your Form W–2.

Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non–Accountable plans, refer to Publication 463 and Topic 514.

Generally, if you are an employee, to deduct your car expenses including expenses that exceed reimbursement under an accountable plan, you must complete Form 2106 (PDF) or Form 2106-EZ (PDF) and itemize your deductions on Form 1040, Schedule A (PDF).

Your expenses will be subject to the 2% of adjusted gross income limit. Refer to Topic 508 for information on the 2% limit. If you are self–employed, car expenses are deductible on Form 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF), or on Form 1040, Schedule F (PDF) if you are a farmer.

For more information, refer to Publication 463.

Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.

Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A (PDF). You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.

You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.

Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.

For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend.

You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible.

If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.

In determining which is your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.

Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible.

Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long.

If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.

You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time.

If you are unemployed and there is a substantial break between the time of your past work and your looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.

Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

1. Travel by airplane, train, bus, or car between your home and your business destination,

2. Using your car while at your business destination,

3. Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another,

4. Meals and lodging, and

5. Tips you pay for services related to any of these expenses.

Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel.

The deduction for business meals is generally limited to 50% of the unreimbursed cost.

If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106–EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106–EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income.

Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self–employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).

Good records are essential. Refer to Topic 305 for information on record keeping.

For more information on travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses. If you are a member of the National Guard or military reserve you may be able to claim a deduction from income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expense.

To qualify the travel must be: overnight, more than 100 miles from your home, and for drill or meetings. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls.

These expenses are claimed on Form 2106/Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.

Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the two tests discussed in Publication 463.

You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.

Generally, only 50% of food and beverage ("meal") and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.

If you are an employee whose deductible business entertainment expenses are fully sustained and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses.

If you are not reimbursed fully under an accountable plan, your expenses exceed the reimbursement you received under an accountable plan, or you are not reimbursed, use Form 2106 (PDF), or Form 2106-EZ (PDF) to report business entertainment expenses.

These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Form 1040, Schedule A (PDF), and are generally subject to the 2% of adjusted gross income limit.

Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.

If you are self–employed, use Form 1040, Schedule C (PDF), or Form 1040, Schedule C-EZ (PDF), or if you are a farmer, use Form 1040, Schedule F (PDF) to deduct these expenses.

For more information on meal or entertainment expenses, refer to Publication 463.

If you are an employee, you may be able to deduct your work–related expenses as an itemized deduction (subject to limitations) on Form 1040, Schedule A (PDF).

Additional information on this subject can be found in the instructions for the Form 1040, Schedule A. Also, you may refer to Topic 511 for additional information on business travel expenses.

Although commuting costs are not deductible, some local transportation expenses are. Deductible local transportation expenses include the ordinary and necessary expenses of going from one workplace (away from the residence) to another.

If you have an office in your home that you use as your principal place of business for your employer, you may deduct the cost of traveling between your home office and work places associated with your employment.

Refer to Topic 509 for information on home offices. You may deduct the cost of going between your residence and a temporary work location outside of the metropolitan area where you live and normally work. For information on transportation expenses related to your car, refer to Topic 510.

Business entertainment expenses and business gift expenses may be deductible, but subject to certain limits. For information on business entertainment expenses, refer to Topic 512. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses, for additional information on business expenses.

You must keep records to prove the expenses you deduct. For general information on record keeping, refer to Topic 305.

If your employer reimbursed you or gave you an advance or allowance for your employee business expenses that is treated as paid under an accountable plan, the payment should not be shown on your Form W-2 (PDF) as pay. You do not include the payment in your income.

To be an accountable plan, your employer's reimbursement or allowance arrangement must include all three of the following rules:

You must have paid or incurred expenses that are deductible while performing services as an employee.

2. You must adequately account to your employer for these expenses within a reasonable time period, and

3. You must return any excess reimbursement or allowance within a reasonable time period.

If your employer's reimbursement arrangement does not meet all three requirements, the payments you receive should be included in the wages shown on your Form W–2. You must report the payments as income, and you must complete Form 2106 (PDF) or Form 2106-EZ (PDF) and itemize your deductions to deduct your expenses.

If you were reimbursed for travel or transportation under an accountable plan, but at a per diem or mileage rate that exceeds the Federal rate, the excess should be included in the wages on your Form W–2.

If your actual expenses exceed the Federal rate, you must itemize your deductions to deduct the excess. For information about the Federal per diem rates, refer to Publication 1542 and for information regarding mileage rates refer to Publication 463.

Generally, you must use Form 2106 or Form 2106–EZ to figure your deduction for employee business expenses and attach it to your Form 1040 (PDF).

Your deductible expenses are then taken on Form 1040, Schedule A (PDF), as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor.

Topic 508 and Publication 529, Miscellaneous Deductions, also discusses the 2% floor and explains some of the other expenses that are deductible as employee business expenses.

A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.

If your property is not completely destroyed, or if it is personal-use property, determine your loss from a casualty by first figuring the decrease in fair market value of your property as a result of the casualty event. To determine the fair market value of your property, refer to Topic 703. Keep in mind the general definition of fair market value is the price at which property would change hands between a buyer and seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.

If the property was held by you for personal use, you must further reduce your loss by $100. This $100 reduction for losses of personal-use property applies to each casualty or theft event that occurred during the year. The total of all your casualty and theft losses of personal-use property must be further reduced by 10% of your adjusted gross income.

For more information regarding casualty losses of personal-use property and how to deduct them, refer to Topic 507 and Publication 547, Casualties, Disasters, and Thefts.

If your business or income-producing property is completely destroyed, the decrease in fair market value is not considered. Your loss is the adjusted basis of the property, minus any salvage value and any insurance or other reimbursement you receive or expect to receive. For more information on determining adjusted basis, see Publication 551, Basis of Assets.

In figuring your loss, do not consider the loss of future profits or income due to the casualty.

Casualty losses are claimed on Form 4684 (PDF), Casualties and Thefts. Section A is used for personal–use property and Section B is used for business or income-producing property. If personal-use property was destroyed or stolen, you may wish to refer to Publication 584B (PDF), Business Casualty, Disaster, and Theft Loss Workbook.

Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in a Presidentially declared disaster area, you can choose to deduct that loss on your tax return for the year immediately preceding the year of the casualty. If you have already filed your return for the preceding year, the loss may be claimed in the preceding year by filing an amended return, ( Form 1040X (PDF) for Individuals or Form 1120X (PDF) for Corporations).

Generally, you must make the choice to use the preceding year by the due date of the current year's return, without extensions.

For Example:

The election to deduct a 2005 disaster loss on your 2004 return must be made on or before the due date (without extensions) of the 2005 return.

You can revoke this choice within 90 days after making it by returning to the IRS any refund or credit you received from making the choice. If you revoke your choice before receiving a refund, you must return the refund within 30 days after receiving it for the revocation to be effective.

Generally, you can choose to postpone reporting gain due to insurance proceeds that exceed your basis in property destroyed or damaged by a casualty if you purchase replacement property or repair the damage within two years. Postponement of gain is only available if the amount you spend on replacing or repairing your property is equal to, or exceeds, the insurance proceeds you receive. Otherwise, the excess of the insurance proceeds over the amount you spend to replace or repair your property must be reported as gain.

If your main home, or any of its contents, is damaged or destroyed as a result of a disaster in a Presidentially declared disaster area, do not report any gain due to insurance proceeds you receive for unscheduled personal property, such as damaged furniture, that was part of the contents of your home. You can choose to postpone gain from any other insurance proceeds received for your main home or its contents if you purchase replacement property within four years after the close of the first tax year in which any gain is realized. For this purpose, insurance proceeds received for the home or its contents are treated as being received for a single item of property, and any replacement property you purchase that is similar or related in service or use to your home or its contents is treated as similar or related in service or use to that single item of property. Again, postponement of gain is only available if the amount you spend on replacing or repairing your property is equal to, or exceeds, the insurance proceeds you receive. Otherwise, you must recognize gain to the extent that the insurance proceeds are more than the cost of your replacement property. Renters qualify to choose relief under these rules if the rented residence is their main home.

If your home is located in a Presidentially declared disaster area and your state or local government orders you to tear it down or move it because it is no longer safe to live in, the resulting loss in value is treated as a casualty loss from a disaster. Figure your loss in the same way as any other casualty loss of personal-use property. The State or local government order must be issued within 120 days after the area is declared a disaster area.

If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536, Net Operating Losses.

The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. The tax deadlines the IRS may postpone include those for filing income, estate, gift, generation-skipping transfer, certain excise, and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA.

If the IRS postpones the due date for filing your return and for paying your tax and you are affected by a Presidentially declared disaster area, the IRS may abate the interest on underpaid tax that would otherwise accrue for the period of the postponement.

The standard deduction is a dollar amount that reduces the amount of income on which you are taxed. You cannot take the standard deduction if you claim itemized deductions.

In some cases, your standard deduction can consist of two parts, the basic standard deduction and additional standard deduction amount, for age, or blindness, or both.

In general, the basic standard deduction is adjusted each year for inflation and varies according to your filing status. The basic standard deduction of an individual who can be claimed as a dependent on another person's tax return is the greater of:

1. An amount specified by law, or

2. The individual's earned income plus a specified amount (but the total cannot be more than the basic standard deduction for his or her filing status).

The additional standard deduction amount for age, or blindness, or both is specified by law and varies based on your filing status. If you file a separate return and can claim an exemption for your spouse, you will be allowed any additional amounts that apply to you or your spouse.

The additional amount for age will be allowed if you are age 65 or older at the end of the tax year. You are considered to be 65 on the day before your 65th birthday.

The additional amount for blindness will be allowed if you are blind on the last day of the tax year.

For example, a single taxpayer who is age 65 and legally blind would be entitled to a basic standard deduction and additional standard deductions for age and blindness.

If you or your spouse were 65 or older or blind at the end of the year, be sure to claim the additional standard deduction amounts by checking the appropriate boxes on Form 1040A (PDF) or Form 1040 (PDF). The additional standard deduction amounts cannot be claimed on Form 1040EZ.

Certain individuals are not entitled to the standard deduction. They are:

1. A married individual filing a separate return whose spouse itemizes deductions,2. An individual who was a nonresident alien or dual status alien during any part of the year, or

3. An individual who files a return for a period of less than 12 months due to a change in his or her annual accounting cycle.

For more information, refer to Publication 501, Exemptions, Standard Deduction, and Filing Information.

If you qualify and if you so choose, the IRS will figure your tax and certain credits on Form 1040EZ (PDF), Form 1040A (PDF), or Form 1040 (PDF) if you mail your return by the due date.

This applies even if you do not have to file a return, but are filing to claim the earned income credit or a refund of taxes paid. If you paid too much tax (either through withholding or estimated taxes), you will receive a refund.

If you did not pay enough, you will receive a bill. If a balance is due, make your check payable to the United States Treasury; be sure to list your social security number(s), tax year, form number, and telephone number on the check or money order.

If the IRS figures your tax, you will not be charged interest or penalty for late payment if the bill for the tax due is paid within 30 days of the date of the bill, or the due date of the return, whichever is later.

If you did not pay enough tax during the year, however, you may be charged a penalty for underpayment of estimated tax. Refer to Topic 306, Penalty for Underpayment of Estimated Tax, for more detailed information.

Certain parts of the return will need to be completed and any schedules that apply. Refer to Publication 967, The IRS Will Figure Your Tax, for complete information.

If you qualify for the earned income credit or the tax credit for the elderly or the disabled, we will figure it for you. However, there are certain requirements you must meet to qualify for these credits. Refer to Publication 596,

Earned Income Credit, and Publication 524, Credit for the Elderly or the Disabled, to see if you qualify. Also, refer to Topic 601 for Earned Income Credit.

Publication 967 provides details on what information you must provide us, such as which lines you must fill in and which forms you must complete and attach to your return. This publication also details the circumstances under which certain taxpayers do not qualify to have the IRS figure their tax.

Part of a child's investment income may be taxed at the parent's tax rate for taxable years beginning before May 26, 2007 if:

1. The child was under age 18 at the end of the tax year,

2. At least one of the child's parents was alive at the end of the tax year,

3. The child's investment income for the tax year was more than the dollar amount specified by law ($1,700 for 2007),

4. The child is required to file a tax return for the tax year, and

5. The child does not file a joint return for the year.

The child's tax is figured on Form 8615 (PDF), Tax for Children Under Age 18 With Investment Income of More Than $1,700. This form must be attached to the child's tax return.

You as a parent may be able to avoid having to file a tax return for your child by including the child's income on your tax return. You can choose to do this if all of the following conditions are met:

1. Your child was under age 18 at the end of the tax year,

2. Your child is required to file a return unless you make this election,

3. Your child had income only from interest and dividends, which includes Alaska Permanent Fund dividends and capital gain distributions,

4. The interest and dividend income was less than the certain amount relative to the tax year ($8,500 for 2007),

5. No estimated tax payments were made for the tax year, and no prior tax year's tax overpayment was applied to the current tax year, under your child's name and social security number,

6. No federal income tax was withheld from your child's income under backup withholding, and

7. You are the parent whose return must be used when applying the special tax rules for children under age 18.

If you do not file a joint return with the child's other parent, refer to Publication 929, Tax Rules for Children and Dependents, to find out which parent's return may include the child's income.

To make this choice, attach Form 8814 (PDF), Parents' Election to Report Child's Interest and Dividends, to your Form 1040 (PDF).

For more information refer to Publication 929, Tax Rules for Children and Dependents. You will need this publication to complete Form 8615 if the child has capital gain distributions.

The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

For example, if you are experiencing financial problems and will be evicted if you don't pay the rent, the Taxpayer Advocate Service may be able to assist you in obtaining your refund expeditiously.

The Taxpayer Advocate Service also may be able to assist you if you have experienced a delay of more than 30 days to resolve a tax-related problem or have not received a response by the date promised. The service is free, confidential, tailored to meet your needs, and available for businesses as well as individuals.

While the Taxpayer Advocate Service cannot change the law or make a technical tax decision, it can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

You can contact the Taxpayer Advocate Service by calling its toll–free number 1-877-777-4778, TTY/TTD 1-800-829-4059 to see if you are eligible for assistance. You can also call or write to your Local Taxpayer Advocate, whose address and phone number are listed in your local telephone directory and in Publication 1546 (PDF), The Taxpayer Advocate Service of the IRS—How to Get Help With Unresolved Tax Problems.

If you write, please be sure to include your social security number or employer identification number, your return address and a phone number where you can be reached during the day. Include with your letter, copies of any correspondence you have received from the IRS.

In addition, please describe your problem, the tax years involved and any previous attempts to solve the problem (including any offices you contacted). You can also file Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf.

To learn more about the Taxpayer Advocate Service, see www.irs.gov/advocate.

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If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Publication 523, Selling Your Home, provides rules and worksheets.

If you sold your home under a contract that provides for part or all of the selling price to be paid in a later year, you made an "installment sale". Refer to Topic 705, Installment Sales, for more information.

You must meet certain tests addressed in Publication 523 to be eligible for the exclusion. In general, you are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale.

Report the sale of your main home only if you have a gain that is not excluded from your income. If you have a gain that is not excluded you must report it on Form 1040, Schedule D (PDF), Capital Gains and Losses.

If you were on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, you may suspend the five-year test period for up to 10 years. You are on qualified extended duty when, for more than 90 days or for an indefinite period, you are:

At a duty station that is at least 50 miles from your main home, or

Residing under government orders in government housing.

Basis is generally the amount of your investment in a property. For tax purposes, use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale or exchange of the property.

The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase.

Your basis in some assets cannot be determined by cost. If you acquire property other than through a purchase, refer to Publication 551, Basis of Assets, for more information.

If you buy stocks or bonds your basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have stocks or bonds that you did not purchase, your basis may be determined by their fair market value or the previous owner's adjusted basis.

Refer to Publication 550, Investment Income and Expenses, for more information. For information on the basis of mutual fund shares, refer to Publication 564, Mutual Fund Distributions.

Before figuring gain or loss on a sale, exchange, or other disposition of property, or figuring allowable depreciation, you must usually determine the adjusted basis of that property.

Certain events that occur during your period of ownership may increase or decrease your basis, resulting in an "adjustedbasis". Increase your basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as depreciation allowable, and insurance reimbursements for casualty and theft losses.

You generally cannot deduct, in one year, the entire cost of property you purchased, either for use in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year.

Instead, you can depreciate it. That is, you can spread the cost over a number of years, and deduct a part of the cost each year.

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. You cannot claim depreciation on property held for personal purposes.

If you use property, such as a car, for both business or investment and personal purposes, only the business or investment use portion may be depreciated. You may depreciate property that meets all five of the following tests.

1. It must be property you own.

2. It must be used in a business or other income–producing activity.

3. It must have a determinable useful life.

4. It must be expected to last more than one year.

5. It must not be excepted property. Excepted property (as described in Publication 946, How to Depreciate Property) includes certain intangible property, certain term interests, and property placed in service and disposed of in the same year.

Generally, if you are depreciating property you placed in service before 1987, you must use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past. For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS).

For more information, refer to Publication 946, How to Depreciate Property, or Publication 534 (PDF), Depreciating Property Placed in Service Before 1987. You can also find information on depreciation in Publication 527, Residential Rental Property (Including Rental of Vacation Homes), Publication 463, Travel, Entertainment, Gift, and Car Expenses, Publication 587, Business Use of Your Home, and Publication 225, Farmer's Tax Guide.

An installment sale is a sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs. You are required to report the sale on the installment method unless you "elect out" in the year of the sale.

If you elect out, you report all the gain as income in the year of the sale. Installment sale rules do not apply to losses. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market.

Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received.

Use Form 6252 (PDF), Installment Sale Income, to report installment income each year. You will need to file Form 1040 (PDF), and may need to attach Form 4797 (PDF) and Form 1040, Schedule D (PDF).

In general, interest should be charged on an installment sale. If interest is not charged or the interest rate is too low, there is a minimum amount of interest you, as a seller, are considered to have received.

This "imputed" or "unstated" interest is taxable. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletin.

You can get this information by contacting the IRS at 1–800–829–1040 or on the IRS website at www.irs.gov.

For additional information, refer to Publication 537, Installment Sales.

1 EARNED INCOME TAX CREDIT

You may qualify for the Earned Income Tax Credit, or EITC, if you worked last year, but did not earn a lot of money.

EITC is a refundable tax credit meaning you could qualify for a tax refund even if you did not have federal income tax withheld.

To qualify for the credit, you must:

Have a valid Social Security Number (if you are filing a joint return, your spouse also must have a valid Social Security Number)

Have earned income from employment or from self-employment

Have a filing status other than married, filing separately

Be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return

Not be a qualifying child of another person (if you are filing a joint return, your spouse also can not be a qualifying person)

Not file Form 2555 or 2555-EZ (related to foreign earned income), and

Have a qualifying child OR:

be age 25 but under 65 at the end of the year

live in the United States for more than half the year, and o not qualify as a dependent of another person

If you qualify, the amount of your EITC will depend on whether you have children, the number of children you have, and the amount of your wages and income last year.

For more information or to see if you qualify, go to www.irs.gov/eitc or call 1–800–829–3676 and request Publication 596, Earned Income Credit.

2 CHILD AND DEPENDENT CARE CREDIT

If you paid someone to care for a qualifying individual so you (and your spouse if you are married) could work or look for work, you may be able to claim the credit for child and dependent care expenses.

If you are married, both you and your spouse must have earned income, unless one spouse was either a full–time student or was physically or mentally incapable of self–care. The expenses you paid must have been for the care of one or more of the following qualifying individuals:

1. Your dependent (under the rules for qualifying child) who was under age 13 when care was provided. For certain custodial parents, refer to Child of Divorced or Separated Parents in Publication 503 , Child and Dependent Care Expenses.

A noncustodial parent, however, cannot treat a child as a qualifying person even if the parent may claim the child as an exemption.

2. Your spouse who was mentally or physically not able to care for himself or herself and who has the same principal place of abode as you for more than one-half of the year.

3. Your dependent who was physically or mentally not able to care for himself or herself, for whom you can claim an exemption, and who has the same principal place of abode as you for more than one-half of the year.

In addition to the conditions just described, to take the credit, you must meet all the following conditions:

1. You must provide the taxpayer identification number (usually the social security number) of the qualifying person.

2. Your filing status must be a status other than married filing separate (You must file a joint return if you are married.)

3. The payments for care cannot be paid to someone you can claim as your dependent, or to your child who is under age 19 even if he or she is not your dependent.

4. You must report the name, address, and taxpayer identification number, (either the social security number, or the employer identification number) of the care provider on your return.

If the care provider is tax exempt, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider.

If you do not provide information regarding the care provider, you may still be eligible for the credit if it is shown that you exercised due diligence in attempting to provide the required information.

If you qualify for the credit, complete Form 1040A, Schedule 2 (PDF), or Form 2441 (PDF) with Form 1040 (PDF). If you received dependent care benefits from your employer (this amount should be shown on your Form W-2 (PDF)), you must complete Part III of Schedule 2 (Form 1040A) or Form 2441. You cannot use Form 1040EZ if you claim the child and dependent care credit.

The credit is a percentage, based on your adjusted gross income, of the amount of work–related child and dependent care expenses you paid to a care provider.

There is a maximum dollar limit of dependent care expenses you can use for this credit. The amount of the maximum dollar limit depends on the taxable year and the number of qualifying children.

These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income. Refer to Publication 503, Child and Dependent Care Expenses, for additional information.

If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax.

For information, refer to Publication 926, Household Employer's Tax Guide, or to Topic 756.

3 ADOPTION CREDIT

You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child (including a child with special needs). The adoption credit is an amount subtracted from your tax liability.

Although the credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit on the current year return.

The adoption credit is not available for any reimbursed expense. In addition to the credit, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

For both the credit or the exclusion, qualifying expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child.

An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself. The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final.

An eligible child is also a child with special needs if he or she is a United States citizen or resident and a state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided.

Under certain circumstances, the amount of your qualified adoption expenses may be increased if you adopted an eligible child with special needs.

The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit.

Under the dollar limit the amount of your adoption credit or exclusion is limited to the dollar limit for that year for each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar amount applies separately to each.

For example, if we assume the dollar limit for the year is $10,000 and you paid $9,000 in qualifying adoption expenses for a final adoption, while your employer paid $4,000 of additional qualifying adoption expenses, you may be able to claim a credit of up to $9,000 and also exclude up to $4,000.

The dollar limit for a particular year must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort.

The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion.

If your modified AGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. If your modified AGI is above the maximum phase out amount for the year, your credit or exclusion will be eliminated.

Generally, if you are married, you must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements.

To take the credit or exclusion, complete Form 8839 (PDF), Qualified Adoption Expenses, and attach the form to your Form 1040 (PDF) or Form 1040A (PDF).

4 EXCESS SOCIAL SECURITY and RRTA TAX WITHHELD

Most employers must withhold social security tax from your wages. Certain government employers (some federal, state, and local governments) do not have to withhold social security tax.

If you work for a railroad employer, your employer must withhold Tier 1 railroad retirement (RRTA) tax and Tier 2 RRTA tax.

If you had more than one employer and your total wages were over the wage base limit for the year, too much social security tax or Tier 1 RRTA may have been withheld. The wage base limit for the year can be found in the Form 1040 Instructions.

If you had more than one railroad employer, and your total compensation was over the maximum amount of wages subject to Tier 2 RRTA, too much Tier 2 railroad retirement (RRTA) tax may have been withheld.

If you had too much social security tax or Tier 1 RRTA withheld, you may be able to claim the excess as a credit against your income tax. If any one employer withheld too much social security or RRTA tax, you cannot claim the excess as a credit against your income tax.

Your employer should make an adjustment of the excess for you. If the employer does not make an adjustment, you can use Form 843 (PDF), Claim for Refund and Request for Abatement to claim a refund.

For details, including how to compute the amount of excess credit, refer to Publication 505, Tax Withholding and Estimated Tax.

5 RETIREMENT SAVINGS CONTRIBUTIONS CREDIT

If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement (IRA), you may be able to take a tax credit.

The amount of the saver's credit you can get is based on the contributions you make and your credit rate. Refer to Chapter 4, Retirement Savings Contributions Credit, in Publication 590, Individual Retirement Arrangements (IRAs), for more information. Your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income.

The lower your income, the higher the credit rate; your credit rate also depends on your filing status. These two factors will determine the maximum credit you may be allowed to take.

Use Form 8880, Credit for Qualified Retirement Savings Contributions, to determine the rate and amount of the credit. Enter the amount of the credit on Form 1040 (PDF), or on Form 1040A (PDF). You cannot use1040EZ to claim this credit.

Social Security and Medicare Withholding Rates

The Federal Insurance Contributions Act (FICA) tax includes two separate taxes. One is the social security tax and the other is the Medicare tax. Different rates apply for each of these. Only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for the year.

If you worked for two or more employers during the year and your total wages exceeded the maximum amount for that year, too much social security tax may have been withheld from your pay. You can claim the excess as a credit on the current year tax return. You must file Form 1040 (PDF) or Form 1040A (PDF) to claim this credit.

For more information, refer to Publication 505, Tax Withholding and Estimated Tax.

It is your responsibility, as an employer, to file Copy A of Form W-2 (PDF), Wage and Tax Statement, with the Social Security Administration (SSA) for your employees, showing the wages paid and taxes withheld for the year.

Since Form W-2 is the only document used to transmit information on your employees' social security and Medicare wages for the year, it is very important to prepare the forms correctly and timely.

There are separate Form W-2 and W-3 Instructions. Use Form W-3, Transmittal of Wage and Tax Statements, as a cover sheet when filing one or more Forms W-2 with the SSA.

Be sure to order Form W-3 when you order your W-2 forms. If you have questions about a particular box on Forms W-2 or W-3, refer to the instructions, which give a detailed explanation of each box. Here are a few important items to keep in mind when preparing Form W-2:

Type all entries using black ink and, if possible, a 12–point Courier font.

Use decimal points followed by cents (or zeroes for no cents). Do not use dollar signs or commas.

Please do not make any erasures, cross-outs, or white-outs. Copy A, which is the first page, must be error free. If you make an error on a form, put an "X" in the "Void" box, go to the next Form W-2 and start again. Do not mark the next Form W–2 as corrected. 4. Form W-2 is printed with two forms on a page. Send in the whole Copy A page (the page printed with red ink) even if one form is blank or void. Do not cut or fold the page nor staple Forms W-2 to each other, or to Form W-3.

The official Form W-2 comes in 6 copies. Copy A must be sent to the SSA with the transmittal Form W-3 by the last day of February of the year succeeding the tax year to which the forms relate.

Special due dates apply if you have terminated your business. See Form W-2 and W-3 Instructions. Form W-3 is used to transmit the Forms W-2 and contains figures reflecting the box totals of all the Forms W-2 being sent. The address for mailing Copy A of the Forms W-2 and W–3 is listed in the separate Form W-2 and W-3 Instructions.

Keep Copy D of Form W-2 for your own records. Send Copy 1 to your state tax department. Contact that department for requirements and transmittal information.

You must give the remaining copies of Form W-2 to the employee by January 31, of the succeeding calendar year. If an employee stops working for you before the end of the year, you may give your former employee Form W-2 anytime prior to January 31, but no later than January 31.

If the employee asks for the Form W-2, you must give Copy B, Copy C, and Copy 2 to the employee within 30 days of the request, or within 30 days of the final wage payment, whichever is later.

The totals for amounts reported on the related forms, ( Form 941 (PDF), Form 943 (PDF), Form 944, or Form 1040, Schedule H (PDF) for the year) should equal those same totals reported on your Form W-2. If the totals do not match, you should generally make corrections.

If you discover an error on an employees' Form W-2 after sending it to the SSA, submit a Form W-2c, Corrected Wage and Tax Statement. You must submit a transmittal Form W-3c, Transmittal of Corrected Wage and Tax Statements, with any Forms W-2c.

Employers filing 250 or more Forms W-2 must file electronically unless granted a waiver by the IRS. However, all employers are encouraged to file Forms W-2 electronically, even if filing fewer than 250 Forms W-2. If you file your Forms W-2 electronically, the due date is March 31st.

For more information on electronic filing, refer to Topic 801, Topic 802, Topic 803, Topic 804, and Topic 805. Additionally, by using a personal computer and a modem, you may obtain additional information on electronic filing of Forms W-2 from the SSA's Business Services Online (BSO).

You can access BSO at www.socialsecurity.gov/employer. You can also get electronic specifications by contacting the SSA's Employee Reporting Branch at 1–800–772–6270. SSA no longer accepts magnetic tapes, cartridges, or 3 1/2" diskettes. All Forms W-2 must be filed either electronically or on paper.

You may also want to refer to Publication 15, (Circular E), Employer's Tax Guide, Publication 51, ( Circular A), Agricultural Employer's Tax Guide, Publication 15-A (PDF), Employer's Supplemental Tax Guide, Publication 393 (PDF), Federal Employment Tax Forms, Form 8809 (PDF), Application for Extension of Time To File Information Returns, and Form 8508 (PDF), Request for Waiver From Filing Information Returns Electronically/Magnetically.

Employee's Withholding Allowance Certificate

When you hire an employee, you must have the employee complete a Form W-4 (PDF), Employee's Withholding Allowance Certificate. Form W-4 tells you, as an employer, how many withholding allowances to use when you deduct Federal income tax from the employees' pay. Form W-4 includes detailed worksheets to help the employee figure his or her correct number of withholding allowances. Employees may also want to access the withholding calculator on the IRS website at www.irs.gov/individuals for help in completing Form W-4. Tell any nonresident alien employees to see the Form 8233 Instructions before completing a Form W-4

If an employee qualifies, Form W-4 is also used by the employee to tell you not to deduct any Federal income tax from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations apply. See the instructions for Form W-4. A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if he or she is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, withhold as you did before.

After the employee completes and signs the Form W-4, you must keep it in your files. This form serves as verification that you are withholding federal income tax according to the employe's instructions and needs to be available for inspection should the IRS ever request it.

In the past, employers had to routinely send the IRS any Form W-4 claiming complete exemption from withholding if $200 or more in weekly wages was expected or claiming more than 10 allowances. Employers no longer have to routinely submit these Forms W-4 to the IRS. However, Forms W-4 are still subject to review. Employers may be directed (in a written notice or in future published guidance) to send certain Forms W-4 to the IRS.

The IRS will also use information reported on Forms W-2, Wage and Tax Statement, to more effectively identify employees with withholding compliance problems. In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a notice (commonly referred to as a "lock-in-letter") to the employer specifying the maximum number of withholding allowances permitted for a specific employee. The lock-in letter will also specify the marital status for purposes of calculating the required withholding under the lock-in letter. The IRS will provide the employee with an opportunity to dispute the determination before the employer adjusts withholding based on the lock-in letter.

The IRS will send a letter to the employee explaining that the IRS will require the employer to start withholding additional income tax unless the employee contacts the IRS by telephone or in writing to explain why the employee should not have withholding increased. A toll-free number and address for the unit handling this program will be provided in the letter. As an additional safeguard, the employer will also receive a notice to provide to the employee.

After the lock-in letter takes effect, the employer must disregard any Form W-4 that claims more allowances or exempt status, until the IRS notifies the employer to withhold tax based on the new Form W-4. However, if, at any time, the employee furnishes a Form W-4 that claims a marital status, number of withholding allowances, and any additional withholding that results in more withholding than would result from applying the marital status and number of withholding allowances permitted in the lock-in letter, the employer must withhold tax based on that Form W-4. Employers who use electronic Form W-4 systems must make sure the employee can not override the lock-in letter to decrease withholding via an electronic Form W-4 system.

After the lock-in letter takes effect, if the employee wants to claim complete exemption from withholding or claim a number of withholding allowances more than the maximum number specified by the IRS in the lock-in letter, the employee must submit a new Form W-4 and a written statement to support the claims made by the employee on the Form W-4 to the IRS.

You should inform your employees of the importance of submitting an accurate Form W–4. An employee may be subject to a $500 penalty if he or she submits, with no reasonable basis, a Form W–4 that results in less tax being withheld than is required.

You should keep blank Forms W–4 for the current year on hand so you can provide them to your current and new employees. An employee may want to change the number of withholding allowances or his or her marital status on Form W–4 for any number of reasons, such as marriage, an increase or decrease in the number of dependents, or an increase or decrease in the amount of itemized deductions or tax credits anticipated for the tax year. Any of these reasons could affect the employe's tax liability. If you receive a revised Form W–4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W–4, assuming there is no lock-in letter in effect.

An employer can download and print Form W-4 from the IRS website at www.irs.gov. Taxpayers may also order Forms W-4 by calling 1-800-TAX-FORM (1-800-829-3676). TTY/TDD users may call 1-800-829-4059 to order Forms W-4. A substitute Form W-4, developed by the employer, may be used instead of the official Form W-4, if the employer also provides the tables, instructions, and worksheets contained in the Form W-4 in effect at that time. Employers may refuse to accept a substitute form developed by an employee and, if the form is rejected, the employee submitting such form will be treated as failing to furnish a Form W-4.

If an employee fails to give you a properly completed Form W–4, you must withhold federal income tax from his or her wages, as if he or she were single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.

Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies that the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. When you get an invalid Form W-4, do not use it to determine federal withholding. Tell the employee that it is invalid and ask for another one. If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.

For additional information, refer to Publication 15, (Circular E), Employer's Tax Guide, Publication 505, Tax Withholding and Estimated Tax, Publication 919, How Do I Adjust My Tax Withholding?, and the Withholding Compliance Questions & Answers on the IRS website at www.irs.gov. For the procedures for withholding income taxes on the wages of nonresident alien employees, refer to Notice 2005-76 and Aliens Employed in the U.S. on the IRS website at www.irs.gov.

Tax Deductions To Editorials