Tax Deductions

With the Obama administration and private lenders actively considering mortgage-principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued an advisory to taxpayers who receive -- or seek to receive -- such assistance if it's offered. The IRS gets involved in mortgage principal write-downs because the federal tax code generally treats any forgiveness of debt by a creditor in excess of $600 as ordinary taxable income to the recipient.

On April 15, everyone's in favor of tax reform. Nobody can survive the ordeal of preparing a federal income tax return without concluding that there must be a simpler, fairer way to pay for the federal government. And so - as inevitably as death and, well, you know - the presidential campaigns promise us some kind of tax reform. President Obama spent much of last week promoting his "Buffett rule," a proposal to require anyone who makes more than $1 million year to pay federal taxes at a minimum of 30%. It's a matter of basic fairness, he says.

If you own a home, it pays to know the tax breaks that could be available to you. Here are five deductions spotlighted by personal finance writer David Bakke for the Zillow real estate blog. For more specific information, see your tax preparer or call the IRS help line at (800) 829-1040. • Mortgage interest. You're generally entitled to reduce your taxable income by the amount of mortgage interest you pay, as long as you itemize deductions on your tax return. Your lender should have sent you a 1098 form in January showing exactly how much interest was paid.

If you own a home, it pays to know the tax breaks that could be available to you. Here are five deductions spotlighted by personal finance writer David Bakke for the Zillow real estate blog. For more specific information, see your tax preparer or call the IRS help line at (800) 829-1040. • Mortgage interest. You're generally entitled to reduce your taxable income by the amount of mortgage interest you pay, as long as you itemize deductions on your tax return. Your lender should have sent you a 1098 form in January showing exactly how much interest was paid.

Dear Karen: Will I be audited if I claim tax deductions for my new business? Answer: Audit risk rises when taxpayers file a Schedule C, which reports business income and expenses, along with their Form 1040, according to IRS statistics. It's unlikely that simply including a Schedule C will trigger an audit, however. Audit risk for Schedule C returns was 1.9% when income was less than $100,000 but 4.2% for income between $100,000 and $200,000, IRS data for 2009 show.

In the face of opposition from Congress, President Obama on Tuesday vigorously defended his proposal to scale back two popular tax breaks by limiting the ability of upper-income taxpayers to deduct home mortgage interest and gifts to charities.

In the June 27 Your Mortgage column, Jack Guttentag says that the "principal repayment yields a return equal to the interest rate on your loan." That completely ignores the benefits of income tax deductions. In a state like California with high income taxes, and for those in higher federal tax brackets, the impact on the analysis is significant. JOHN STERN Mar Vista

Combining the reasonable and the unreasonable in an article must be much like telling half-truths; it confuses the issues and allows that which is totally unreasonable to pass for that which is reasonable. Although the tax deductions Goldberg criticizes are questionable indeed, his equating them to entitlements and subsidies is even more questionable. The only assumption that makes this equating of deductions with entitlements sensible is that all earnings belong to the government. Does anyone who is not a politician or bureaucrat really accept that assumption?

One of the questions home office owners ask as they prepare their taxes is, "Can I take a deduction for a home office?" The words regularly and exclusively are key to whether a home office qualifies for the deduction, said Sally Ruhnau, public affairs specialist at the Internal Revenue Service's Laguna Niguel District. "The area of the house designated as a home office needs to be used regularly and exclusively for business," she said.

The City Council has sent a resolution supporting Senate Joint Resolution 30 by state Sen. David A. Roberti (D-Los Angeles) asking the President and the Congress to retain the deductibility of state and local taxes in any tax-reform law. A key feature of President Reagan's tax reform proposal would eliminate state and local taxes as federal tax deductions.

Though its demise drew little attention because of the partisan year-end brawl over the payroll tax cut extension in Congress, a key mortgage financing benefit disappeared at the end of December: the ability of large numbers of home buyers and owners to write off the premiums they pay for mortgage insurance. The loss of that tax deduction — plus mandatory new fees imposed by Congress on all new conventional and FHA loans — could effectively increase the costs of homeownership this year.

Small-business owners will be greeted Jan. 1 with dozens of new laws and regulations. In California, they will include new mandates concerning employees, including a partial ban on checking the credit reports of workers and job applicants. And it's no surprise that there are changes at the federal level too. Here's a guide to some of the new laws and regulations set to go into effect in 2012. Federal taxes As of January, there will be a major decrease in how much of the total cost of new equipment - including items such as computers, machinery and vehicles - a business can deduct upfront on its tax return.

Psst: Want to know a way to reduce our national debt by a quarter of a trillion dollars over the next decade, and remove an often abused and possibly unconstitutional section of the tax code? Are you sure you do? You may want to sit down. Get rid of the federal charitable-giving tax deduction. I know that statement will create a firestorm. I ran the California Community Foundation for 25 years, and the foundation — not to mention your alma mater, the Girl Scouts, the AARP and many other charities — think pretty highly of the tax deduction.

Republicans floated a new deficit reduction proposal to the congressional "super committee" that breaks from their no-new-taxes stance, but the offer was dismissed Tuesday by Democrats because it would lock in lower income tax rates for the wealthiest American households. The $1.2-trillion offer from the GOP comes as Republicans are under pressure to show that their anti-tax commitment will not doom the panel's efforts. The committee is deadlocked as it tries to agree on a proposal by its Thanksgiving deadline to cut federal deficits over the next decade.

Good bad news Re "Phone hacking scandal widens," July 12 I could not be more pleased at the damage inflicted on Rupert Murdoch's global misinformation machine. I regret the harm done to the victims of Murdoch's stooges, but I'm pleased the perpetrators have been caught and will probably pay a heavy price. I hope the left in Britain and the United States will take advantage of Murdoch's weakened state as an opportunity to inflict even more damage on him. As an expat American, I especially hope the left in my country will exploit every opportunity to use these and any further charges that may emerge against Murdoch's stooges at Fox News.

Among the many proposals to raise taxes and cut and reallocate government spending to regain our country's economic health, one of the most sensitive is decreasing the tax deductibility of charitable contributions. The independent Congressional Budget Office recently reviewed 11 options for revising the income tax treatment of charitable giving, and it grouped them into four categories. All establish a floor below which contributions would not be deductible. One proposal retained tax deductibility only for donations exceeding $1,000 per couple or, alternatively, 2% of a person's adjusted gross income.

New York Gov. Mario M. Cuomo, who has risen to the forefront of Democratic critics of President Reagan's tax reform plan, led more than a dozen state, city and county officials Wednesday in urging Congress to retain the federal tax deductions for state and local taxes. In testifying before the House Ways and Means Committee, Cuomo repeated an earlier charge that repealing the deductions--a key component of Reagan's proposal--"would pulverize the middle class."

Want to make a few bucks and get rid of your household clutter at the same time? It may be time for a garage sale. Aaron LaPedis, author of "The Garage Sale Millionaire," has hosted some 50 garage sales of his own and frequents them in search of artwork and antiques. Done right, a garage sale not only can generate some cash but also land you a tax deduction. Here's what you need to do to get the most cash from your clutter. Gather widely: The key to getting lots of customers is having lots of stuff to sell, LaPedis said.

One of the most treasured tenets of the Republican Party — "No new taxes" — has been thrown open to debate by a simple question: What, exactly, is a new tax? The answer, argues Grover Norquist, the godfather of contemporary anti-tax conservatism in Washington, is anything that increases federal revenue. Thus, closing loopholes that have allowed corporate giants and millionaires to slice away at their tax bills would constitute an unacceptable new tax — unless a comparable tax cut is made elsewhere.